[Federal Register Volume 80, Number 248 (Monday, December 28, 2015)]
[Proposed Rules]
[Pages 80998-81154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29890]



[[Page 80997]]

Vol. 80

Monday,

No. 248

December 28, 2015

Part III





Securities and Exchange Commission





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17 CFR Parts 240, 242, 249





Regulation of NMS Stock Alternative Trading Systems; Proposed Rule

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

[[Page 80998]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, 249

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


Regulation of NMS Stock Alternative Trading Systems

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

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

Paper Comments

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

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

FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Senior Special Counsel, 
at (202) 551-6227; Matthew Cursio, Special Counsel, at (202) 551-5748; 
Marsha Dixon, Special Counsel, at (202) 551-5782; Jennifer Dodd, 
Special Counsel, at (202) 551-5653; David Garcia, Special Counsel, at 
(202) 551-5681; or Derek James, Special Counsel, at (202) 551-5792; 
Office of Market Supervision, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-7010.

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

Table of Contents

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

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

I. Introduction

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

[[Page 81000]]

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

[[Page 81001]]

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

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

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

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[[Page 81002]]

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

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

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

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

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

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

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

[[Page 81003]]

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

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

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

[[Page 81004]]

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

II. Current ATS Regulatory Framework

A. Exemption From National Securities Exchange Registration

    A fundamental component of the current ATS regulatory framework 
adopted by the Commission in 1998 is Exchange Act Rule 3b-16.\45\ Rule 
3b-16 was designed to address the blurring of traditional 
classifications between exchanges and broker-dealers as a result of 
advances in technology by providing a more comprehensive and meaningful 
interpretation of what constitutes an exchange under Section 3(a) of 
the Exchange Act.\46\ Rule 3b-16(a) provides a functional test to 
assess whether a trading platform meets the definition of exchange 
under Section 3(a)(1) of the Exchange Act, and thus is required to 
register as a national securities exchange pursuant to Sections 5 and 6 
of the Exchange Act.\47\ Under Rule 3b-16, an organization, 
association, or group of persons shall be considered to constitute, 
maintain, or provide ``a market place or facilities for bringing 
together purchasers and sellers of securities or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange,'' if such organization, association, or group of 
persons: (1) Brings together the orders for securities of multiple 
buyers and sellers; and (2) uses established, non-discretionary methods 
(whether by providing a trading facility or by setting rules) under 
which such orders interact with each other, and the buyers and sellers 
entering such orders agree to the terms of a trade.\48\
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    \45\ See 17 CFR 240.3b-16.
    \46\ See Regulation ATS Adopting Release, supra note 7, at 
70847. Pursuant to Section 3(a)(1) of the Exchange Act, the 
statutory definition of ``exchange'' means ``any organization, 
association, or group of persons, whether incorporated or 
unincorporated, which constitutes, maintains, or provides a market 
place or facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange . . 
.&ensp.” 15 U.S.C. 78c(a)(1).
    \47\ See 15 U.S.C. 78e and 78f. A ``national securities 
exchange'' is an exchange registered as such under Section 6 of the 
Exchange Act.
    \48\ See 17 CFR 240.3b-16(a).
---------------------------------------------------------------------------

    The Commission adopted Exchange Act Rule 3b-16(b) to explicitly 
exclude certain systems that the Commission believed did not meet the 
exchange definition.\49\ Specifically, Rule 3b-16(b) excludes systems 
that perform only traditional broker-dealer activities, including: (1) 
Systems that route orders to a national securities exchange, a market 
operated by a national securities association, or a broker-dealer for 
execution, or (2) systems that allow persons to enter orders for 
execution against the bids and offers of a single dealer if certain 
additional conditions are met.\50\ Accordingly, a system is not 
included in the Commission's interpretation of ``exchange'' if: (1) The 
system fails to meet the two-part test in paragraph (a) of Rule 3b-16; 
(2) the system falls within one of the exclusions in paragraph (b) of 
Rule 3b-16; or (3) the Commission otherwise conditionally or 
unconditionally exempts \51\ the system from the definition.
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    \49\ See Regulation ATS Adopting Release, supra note 7, at 
70852.
    \50\ See 17 CFR 240.3b-16(b). Rule 3b-16(b)(2) excludes systems 
that allow persons to enter orders for execution against the bids 
and offers of a single dealer if, as an incidental part of such 
activities, the system matches orders that are not displayed to any 
person other than the dealer and its employees; or in the course of 
acting as a registered market maker with an SRO, the system displays 
the limit orders of the market maker's, or other broker-dealer's, 
customers, and in addition, matches customer orders with those 
displayed limit orders and, as an incidental part of its market 
making activities, the system crosses or matches orders that are not 
displayed to any person other than the market maker and its 
employees. See 17 CFR 240.3b-16(b)(2). The purpose of the exclusions 
in 17 CFR 240.3b-16(b)(2) was to encompass systems operated by third 
market makers, as well as those systems operated by dealers, 
primarily in debt securities, who display their own quotations to 
customers and other broker-dealers on a proprietary basis. Rule 3b-
16(b)(2)(ii) was adopted to exclude registered market makers that 
display their own quotes and, in order to comply with a Commission 
or SRO rule, customer limit orders, and allow their customers and 
other broker-dealers to enter orders of execution against the 
displayed orders. Additionally, it was designed to allow registered 
market makers, as an incidental activity resulting from their market 
maker status, to match or cross orders for securities in which they 
make a market, even if those orders are not displayed. See 
Regulation ATS Adopting Release, supra note 7, at 70854.
    \51\ See 17 CFR 240.3b-16(e).
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    For those systems that meet the criteria of Rule 3b-16(a) and are 
not excluded under Rule 3b-16(b) of the Exchange Act,\52\ Rule 3a1-
1(a)(2) \53\ provides an exemption from the definition of ``exchange.'' 
Specifically, Exchange Act Rule 3a1-1(a)(2) exempts from the Exchange 
Act Section 3(a)(1) definition of ``exchange'' an organization, 
association, or group of persons that complies with Regulation ATS,\54\ 
which includes, among other things, the requirement to register as a 
broker-dealer.\55\ Therefore, an organization, association, or group of 
persons that complies with Regulation ATS is not subject to Section 5 
of the Exchange Act,\56\ which requires that an ``exchange'' register 
with the Commission as a national securities exchange pursuant to 
Section 6 of the Exchange Act \57\ or otherwise be exempt. 
Additionally, an ATS that is not required to register as a national 
securities exchange pursuant to Section 5 is not an SRO \58\ and is not 
required to comply with applicable requirements.\59\
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    \52\ See 17 CFR 240.3b-16(b).
    \53\ See 17 CFR 240.3a1-1(a)(2).
    \54\ See 17 CFR 240.3a1-1(a)(2). Rule 3a1-1 also provides two 
other exemptions from the definition of ``exchange'' for any ATS 
operated by a national securities association, and any ATS not 
required to comply with Regulation ATS pursuant to Rule 301(a) of 
Regulation ATS. See 17 CFR 240.3a1-1(a)(1) and (3).
    \55\ See 17 CFR 242.301(b)(1).
    \56\ 15 U.S.C. 78e.
    \57\ 15 U.S.C. 78f.
    \58\ See supra note 21 (setting forth the statutory definition 
of SRO).
    \59\ See, e.g., Section 19 of the Exchange Act, 15 U.S.C. 78s.
---------------------------------------------------------------------------

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

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

B. Conditions to the ATS Exemption; Confidential Notice Regime

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

[[Page 81005]]

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

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

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

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

    In addition, Rule 301(b)(2) of Regulation ATS requires an ATS to 
file an initial operation report with the Commission on Form ATS \68\ 
at least 20 days before commencing operations.\69\ The Commission 
stated in the Regulation ATS Adopting Release that Form ATS would 
provide the Commission the opportunity to identify problems that might 
impact investors before the system begins to operate.\70\ Unlike a Form 
1 filed by a national securities exchange, Form ATS is not approved by 
the Commission. Instead, Form ATS provides the Commission with notice 
about its operations prior to commencing operations.\71\
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    \68\ Form ATS and the Form ATS Instructions are available at 
http://www.sec.gov/about/forms/formats.pdf.
    \69\ See 17 CFR 242.301(b)(2)(i).
    \70\ See Regulation ATS Adopting Release, supra note 7, at 
70864.
    \71\ See id. As discussed more fully below, the current notice 
process applicable to ATSs is very different than the process by 
which exchanges register with the Commission and how amendments to 
exchange rules are regulated. See infra notes 158-162 and 
accompanying text.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 81006]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 81007]]

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

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

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

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

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

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

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

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

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

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

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

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

III. Role of ATSs in the Current Equity Market Structure

A. Significant Source of Liquidity for NMS Stocks

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

[[Page 81008]]

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

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

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

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

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

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

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

[[Page 81009]]

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

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

    In contrast to dark pools, an ATS could be an Electronic 
Communication Network (``ECN''). ECNs are ATSs that provide their best-
priced orders for inclusion in the consolidated quotation data, whether 
voluntarily or as required by Rule 301(b)(3) of Regulation ATS.\137\ In 
general, ECNs offer trading services (such as displayed or non-
displayed order types, maker-taker pricing, and data feeds) that are 
analogous to registered national securities exchanges.\138\
---------------------------------------------------------------------------

    \137\ See Rule 600(b)(23) of Regulation NMS, 17 CFR 
242.600(b)(23) (definition of ``electronic communications 
network''); see also 2010 Equity Market Structure Release, supra 
note 124, at 3599.
    \138\ See 2010 Equity Market Structure Release, supra note 124, 
at 3599. See infra note 494 (describing the maker-taker pricing 
model).
---------------------------------------------------------------------------

B. Heightened Operational Complexity and Sophistication of NMS Stock 
ATSs

    Since Regulation ATS was adopted, ATSs have gained market share in 
NMS stocks and have also evolved to become more complex and 
sophisticated trading centers. In addition, ATSs that transact in NMS 
stocks increasingly are operated by multi-service broker-dealers that 
engage in significant brokerage and dealing activities in addition to 
their operation of their ATSs, and the operations of NMS Stock ATSs 
have become increasingly intertwined with operations of their broker-
dealer operator, adding to the complexity of the manner in which those 
ATSs operate.\139\ The Commission is concerned that market participants 
have limited information about the complex operations of NMS Stock ATSs 
and the unique relationship between an NMS Stock ATS and its broker-
dealer operator and the affiliates of the broker-dealer operator, who 
often provide a significant source of liquidity on the NMS Stock ATS. 
The Commission preliminarily believes that improving transparency of 
information available to market participants would enable them to 
better assess NMS Stock ATSs as potential trading venues.\140\
---------------------------------------------------------------------------

    \139\ As exemplified by some commenters' responses and as 
discussed further below, market participants are interested in 
information about, among other things, ATS affiliations, sharing of 
order information, operation of smart order routers and to whom they 
give preference, priority rules, order types, calculation of 
reference prices, and segmentation. See, e.g., infra notes 186 and 
190 and accompanying text (describing comments received from 
Blackrock, Inc. and Bloomberg Tradebook LLC).
    \140\ See, e.g., infra note 187 and accompanying text 
(describing a comment received from the Consumer Federation of 
America).
---------------------------------------------------------------------------

    Since Regulation ATS was adopted, ATSs that effect transactions in 
NMS stocks have grown increasingly complex in terms of the services and 
functionalities that they offer subscribers. Over the past 16 years, 
these ATSs, like registered national securities exchanges, have used 
advances in technology to improve the speed, capacity, and efficiency 
of their trading functionalities to bring together the orders in NMS 
stocks of multiple buyers and sellers using established, non-
discretionary methods under which such orders interact and trade. 
Before Regulation ATS was adopted, ATSs primarily operated as ECNs, as 
dark pools were not prevalent during that period. Today, the vast 
majority of NMS Stock ATSs operate as dark pools. Furthermore, based on 
Commission experience, ATSs that traded NMS stocks prior to the 
adoption of Regulation ATS did not offer the same services and 
functionalities as they do today. Today, most NMS Stock ATSs, like most 
registered national securities exchanges, are fully-electronic, 
automated systems that provide a myriad of trading services to 
facilitate order interaction among various types of users on the NMS 
Stock ATS. For example, NMS Stock ATSs offer a wide range of order 
types, which are a primary means by which subscribers communicate their 
instructions for the handling of their orders on the ATS. Based on 
Commission experience, some NMS Stock ATSs allow subscribers to submit 
indications of interests, conditional orders, and various types of 
pegged orders, often with time-in-force, or other specifications, which 
are similar to those offered by exchanges, such as all or none, minimum 
execution quantity, immediate or cancel, good till cancelled, and day. 
Unlike registered national securities exchanges, however, most NMS 
Stock ATSs have adopted a dark trading model, and do not display any 
quotations in the consolidated quotation data.
    Additionally, at the time Regulation ATS was adopted, SORs were not 
a primary point of access to ATSs that trade NMS stocks. Today, 
however, brokers compete to offer sophisticated technology tools to 
monitor liquidity at many different venues and to implement order 
routing strategies.\141\ Using that knowledge of available liquidity, 
many brokers offer smart order routing technology to route orders to 
various trading centers to access such liquidity.\142\ Based on 
Commission experience, broker-dealer operators frequently use SORs (or 
similar functionality) to route orders to their NMS Stock ATSs in 
today's marketplace. Furthermore, for some NMS Stock ATSs, most orders 
must pass through the broker-dealer operator's SOR (or similar 
functionality) to enter the ATS.\143\
---------------------------------------------------------------------------

    \141\ See 2010 Equity Market Structure Release, supra note 124, 
75 FR at 3602.
    \142\ See id.
    \143\ For a further discussion about the increased use of SORs 
(or similar functionalities) by broker-dealer operators of NMS Stock 
ATSs, see infra Section VII.B.7.
---------------------------------------------------------------------------

    In today's highly automated trading environment, NMS Stock ATSs 
offer various matching systems to bring together orders and 
counterparties in NMS stocks. These automated matching systems, 
including limit order books, crossing systems, and various types of 
auctions, are generally pre-programmed to execute orders pursuant to 
established non-discretionary methods. These established non-
discretionary methods dictate the terms of trading among multiple 
buyers and sellers entering orders into the NMS Stock ATS and generally 
include priority and allocation procedures. Based on Commission 
experience, some NMS Stock ATSs offer price-time priority, while others 
offer midpoint only matching with time priority, or time priority at 
other prices derived from the NBBO. Some NMS Stock ATSs may also offer 
priority mechanisms with additional overlays. For example, amongst 
orders at a given price, priority may be given to a certain type of 
order (e.g., agency orders), before then applying time priority. 
Additionally, some NMS Stock ATSs offer order routing services similar 
to those offered by national securities exchanges.\144\
---------------------------------------------------------------------------

    \144\ For example, based on Commission experience, some NMS 
Stock ATSs, like national securities exchanges, will route a 
subscriber's order to another trading center when the NMS Stock ATS 
cannot execute the order without trading through the NBBO, or if 
otherwise directed by the subscriber.
---------------------------------------------------------------------------

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

[[Page 81010]]

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

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

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

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

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

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

C. Lack of Operational Transparency for NMS Stock ATSs

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

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

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

[[Page 81011]]

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

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

    By comparison, national securities exchanges, with which NMS Stock 
ATSs directly compete, are subject to comprehensive registration and 
rule filing requirements under Section 19(b) of the Exchange Act.\157\ 
Under these requirements, national securities exchanges must make 
public their trading rules and detail their trading operations. As 
discussed above, national securities exchanges register with the 
Commission on Form 1, and thereafter file proposed rule changes on Form 
19b-4, which are not confidential, are approved by the Commission or 
become effective by operation of law, and are made public.\158\ These 
mandatory filings publicly disclose, among other things, details about 
the exchange's trading services, operations, order types, order 
interaction protocols, priority procedures, and fees.\159\ A national 
securities exchange must file such a proposed rule change any time it 
seeks to change its rules,\160\ and even non-controversial rule changes 
cannot be implemented until the exchange files a Form 19b-4 with the 
Commission.\161\ In contrast, an ATS can change its operations in 
certain cases before notifying the Commission, and in all cases, 
without obtaining Commission approval or notifying ATS subscribers or 
the public about the change.\162\
---------------------------------------------------------------------------

    \157\ 15 U.S.C. 78s(b).
    \158\ See generally 15 U.S.C. 78s(a) and (b); and 17 CFR 
240.19b-4. See also supra notes 20-23 and accompanying text; http://www.sec.gov/rules/sro.shtml.
    \159\ Among other things, Form 1 requires an exchange applying 
for registration as a national securities exchange to disclose its 
procedures governing entry and display of quotations and orders in 
its system, procedures governing the execution, reporting, clearance 
and settlement of transactions in connection with the system, and 
fees. See Form 1, Exhibits E.2-E.4. The disclosures required in Form 
1 must include sufficient detail for the Commission to determine the 
exchange's rules are consistent with the Act. See generally 15 
U.S.C. 78f(b)(1). Once registered, a national securities exchange 
must file any proposed rule or any proposed change in, addition to, 
or deletion from its rules. See 15 U.S.C. 78s(b)(2).
    \160\ See 15 U.S.C. 78s(b)(1).
    \161\ See 17 CFR 240.19b-4(f).
    \162\ See supra notes 20-25 and accompanying text and infra 
notes 342-343 and accompanying text (discussing, in more detail, the 
differences in the regulatory regimes for registered national 
securities exchanges and ATSs, including with respect to 
requirements related to transparency of operations). See also 17 CFR 
242.301(b)(2) (requiring ATSs to file amendments on Form ATS at 
least 20 days prior to implementing a material change to the 
operation of the ATS, and within 30 calendar days after the end of 
each calendar quarter to update any other information that has 
become inaccurate and not previously reported).
---------------------------------------------------------------------------

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

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

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

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

[[Page 81012]]

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

    \165\ See Regulation of Non-Public Trading Interest, supra note 
123, at 62108 (proposing rules and amendment to joint-industry 
plans).
    \166\ See letter to Mary L. Schapiro, Chairman, Commission, from 
Sen. Edward E. Kaufman, United States Senate, dated August 5, 2010 
(``Kaufman letter''); letters to Elizabeth M. Murphy, Secretary, 
Commission, from Janet M. Kissane, Senior Vice President, Legal & 
Corporate Secretary Office of the General Counsel, NYSE Euronext, 
dated February 22, 2010 (``NYSE Euronext letter #1''); from Jeffrey 
D. Morgan, CAE, President and CEO, National Investor Relations 
Institute, dated February 16, 2010 (``National Investor Relations 
Institute letter''); letter to the Commission, from Seth Merrin, 
Chief Executive Officer; Anthony Barchetto, Head of Trading 
Strategy; Jay Biancamo, Global Head of Marketplace; Vlad Khandros, 
Market Structure Analyst; Howard Meyerson, General Counsel, 
Liquidnet, Inc., dated December 21, 2009 (``Liquidnet letter #1'').
---------------------------------------------------------------------------

    Three commenters expressed the view that the Commission should 
address the regulatory disparity between national securities exchanges 
and ATSs. Senator Edward E. Kaufman expressed the view that ``as 
trading continues to become faster and more dispersed, it is that much 
more difficult for regulators to perform their vital oversight and 
surveillance functions,'' and that ``the Commission should consider 
strengthening the regulatory requirements for becoming an Alternative 
Trading System or starting a new trading platform for existing market 
centers.'' \167\ Senator Kaufman further urged the Commission to 
``harmonize rules across all market centers to ensure exchanges and 
ATSs are competing on a level playing field that serves the interests 
of all investors.'' NYSE Euronext stated that because ``ATSs now 
represent a significant share of trading volume in NMS stocks . . . the 
time is ripe to move to a framework that has consistent regulatory 
requirements when the trading activity at issue is essentially the 
same.'' \168\ The National Investor Relations Institute opined that 
``the same regulatory oversight, market surveillance, reporting, and 
other investor safeguards that exist for exchanges should be in place 
for all trading venues to ensure maximum investor protection.''\169\
---------------------------------------------------------------------------

    \167\ Kaufman letter, supra note 166, attachment at 4-5.
    \168\ NYSE Euronext letter #1, supra note 166, at 3.
    \169\ National Investor Relations Institute letter, supra note 
166, at 2.
---------------------------------------------------------------------------

    Liquidnet expressed the view that the Commission should require 
institutional brokers, including institutional ATSs, to disclose to 
their customers specific order handling practices and that Regulation 
ATS should be amended to enhance the review process of new ATSs and 
material changes to ATSs' business operations.\170\ Liquidnet stated 
that disclosures by institutional brokers, including institutional 
ATSs, to their customers should include, among other things, 
identification of external venues to which the broker routes orders, 
the process for crossing orders with other orders received by the 
broker, execution of orders as agent and principal, a detailed 
description of the operation and function of each ATS or trading desk 
operated by the broker, a clear and detailed description of each 
algorithm and order type offered by the broker, categories of 
participant and admission criteria for each ATS or trading desk with 
which the customer's order can interact, and internal processes and 
policies to control dissemination of the institution's order and trade 
information and other confidential information.\171\ Liquidnet also 
suggested that the Commission amend ``Regulation ATS to permit the 
Commission to delay the effective date of a new ATS commencing 
operation or of an existing ATS implementing a material business change 
if the Commission believes that information in the ATS filing is 
unclear or incomplete or raises an issue of potential non-compliance 
with applicable law or regulation,'' and expressed support for making 
publicly available ATS filings with the Commission.\172\
---------------------------------------------------------------------------

    \170\ See Liquidnet letter #1, supra note 166, at D-5-6, 11.
    \171\ See Liquidnet letter #1, supra note 166, at D-5-6.
    \172\ Id. at D-11.
---------------------------------------------------------------------------

    In 2010, the Commission issued a Concept Release that, among other 
things, solicited comment on whether trading centers offering 
undisplayed liquidity are subject to appropriate regulatory 
requirements for the type of business they conduct.\173\ Specifically, 
the Commission asked, among other things, for comment on the following: 
\174\
---------------------------------------------------------------------------

    \173\ See 2010 Equity Market Structure Release, supra note 124, 
at 3614.
    \174\ See id.
---------------------------------------------------------------------------

     Do investors have sufficient information about dark pools 
to make informed decisions about whether in fact they should seek 
access to dark pools? Should dark pools be required to provide improved 
transparency on their trading services and the nature of their 
participants? If so, what disclosures should be required and in what 
manner should ATSs provide such disclosures?
     Are there any other aspects of ATS regulation that should 
be enhanced for dark pools or for all ATSs, including ECNs?
     Are there any ways in which Regulation ATS should be 
modified or supplemented to appropriately reflect the significant role 
of ATSs in the current market structure?
    The Commission received 20 comment letters that addressed these 
questions as they relate to the proposal.\175\ The 20 comment letters 
offered contrasting views.
---------------------------------------------------------------------------

    \175\ See letters from Theodore R. Lazo, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated October 24, 2014 (``SIFMA letter #2); Richie 
Prager, Hubert De Jesus, Supurna Vedbrat, and Joanne Medero, 
BlackRock, Inc., dated September 12, 2014 (``Blackrock letter''); 
Micah Hauptman, Consumer Federation of America, dated September 9, 
2014 (``Consumer Federation of America letter''); Christopher Nagy 
and Dave Lauer, KOR Group LLC, dated April 4, 2014 (``KOR Group 
letter''); Bill Neuberger, Andrew Silverman, Paul Fitzgerald, and 
Sapna Patel, Morgan Stanley, dated March 7, 2011 (``Morgan Stanley 
letter''); Raymond M. Tierney III and Gary Stone, Bloomberg 
Tradebook LLC, dated June 28, 2013 (``Bloomberg Tradebook letter''); 
Greg Tusar, Goldman Sachs Execution & Clearing, L.P., and Matthew 
Lavicka, Goldman Sachs & Co., dated June 25, 2010 (``Goldman Sachs 
letter''); Jeffrey S. Wecker, Lime Brokerage LLC, dated May 21, 2010 
(``Lime Brokerage letter''); Andrew C. Small, Scottrade, dated May 
19, 2010 (``Scottrade letter''); Kimberly Unger, The Security 
Traders Association of New York, Inc., dated May 10, 2010 
(``Security Traders Association of New York letter''); Stuart J. 
Kaswell, Managed Funds Association, dated May 7, 2010 (``Managed 
Funds Association letter''); Raymond M. Tierney III, Bloomberg L.P., 
dated May 7, 2010 (``Bloomberg L.P. letter''); James J. Angel, 
Georgetown University, McDonough School of Business, dated January 
16, 2011 (``Angel letter''); Joan C. Conley, Nasdaq OMX Group, Inc., 
dated April 30, 2010 (``Nasdaq OMX letter''); Ann Vlcek, Securities 
Industry and Financial Markets Association, dated April 29, 2010 
(``SIFMA letter #1''); Joseph M. Velli, BNY ConvergEx Group, LLC, 
dated April 29, 2010 (``BNY CovergEx Group letter''); O. Mason 
Hawkins, Richard W. Hussey, Deborah L. Craddock, Jeffrey D. 
Engelberg, and W. Douglas Schrank, Southeastern Asset Management, 
Inc., dated April 28, 2010 (``Southeastern Asset Management 
letter''); Janet M. Kissane, NYSE Euronext, dated April 23, 2010 
(``NYSE Euronext letter #2''); David C. Cushing, Wellington 
Management Company, LLP, dated April 21, 2010 (``Wellington 
Management Company letter''); Seth Merrin, Howard Meyerson, and Vlad 
Khandros, Liquidnet, Inc., dated March 26, 2010 (``Liquidnet letter 
#2'').
---------------------------------------------------------------------------

    Five commenters expressed support for Commission action to address 
the regulatory disparity between national securities exchanges and 
ATSs, particularly where such trading venues perform similar functions. 
Security Traders Association of New York noted that it has ``called for 
the harmonization of regulatory oversight and the need for similar 
rules across venues, including exchanges, ATSs and other liquidity 
sources that are connected through the

[[Page 81013]]

Reg. NMS regulatory framework.'' \176\ Nasdaq OMX expressed the view 
that the ``Commission has flexibility to adopt a more principles-based 
regulatory structure'' which it could use to ``level the competitive 
playing field between ATSs and exchanges,'' and that ``[i]n areas where 
ATS and exchange activities overlap, differences in [regulatory] 
approach should persist only if there is a clear policy basis for those 
differences.'' \177\ NYSE Euronext opined that the ``lighter regulatory 
oversight for ATSs puts transparent, regulated markets at a competitive 
disadvantage, to the potential detriment of investors'' and that ``now 
that ATSs represent a significant share of trading volume in NMS 
stocks, . . . the Commission should address the regulatory disparity 
between registered exchanges and ATSs that engage in trading activities 
analogous to traditional exchange trading.'' \178\ Wellington 
Management Company expressed the view that ``regulatory requirements 
for types of venues should differ only to the extent the differentiated 
requirements are specifically designed to address clearly identifiable 
and compelling needs'' and that ``material disparities in regulatory 
requirements could make it difficult for exchanges to compete with ATSs 
and broker-dealers and could threaten their long-term survival.'' \179\ 
Liquidnet stated that ``[t]o the extent that an exchange conducts the 
equivalent business function as a broker or an ATS, regulators should 
ensure that levels of regulation are consistent.'' \180\
---------------------------------------------------------------------------

    \176\ Security Traders Association of New York letter, supra 
note 175, at 2.
    \177\ Nasdaq OMX letter, supra note 175, at 13, 16.
    \178\ NYSE Euronext letter #2, supra note 175, at 7.
    \179\ Wellington Management Company letter, supra note 175, at 
3.
    \180\ Liquidnet letter #2, supra note 175, at F-7.
---------------------------------------------------------------------------

    However, three commenters expressed the view that in order to 
rectify the regulatory disparity, the Commission should lessen 
regulatory burdens on exchanges, rather than enhance its regulation of 
ATSs. Goldman Sachs urged the Commission to ``consider expanding the 
types of rule changes that exchanges . . . can propose on an 
immediately effective basis,'' which ``would help to level the playing 
field between exchanges and ATSs.'' \181\ Wellington Management Company 
opined that ``the burden of regulation should be shared fairly by 
execution venues'' and that ``exchanges should be granted the ability 
to make certain rule changes in a manner similar to ATSs (i.e., as a 
notification with SEC veto authority, and not as part of a lengthy 
notice, comment, and approval process).'' \182\ Liquidnet stated that 
``regulators should not impose unnecessary burdens on ATSs and brokers, 
but rather should remove unnecessary regulatory burdens from exchanges, 
to the extent that they exist.'' \183\
---------------------------------------------------------------------------

    \181\ Goldman Sachs letter, supra note 175, at 10.
    \182\ Wellington Management Company letter, supra note 175, at 
3.
    \183\ Liquidnet letter #2, supra note 175, at F-7.
---------------------------------------------------------------------------

    Ten commenters expressed the view that ATSs and broker-dealers 
should be required to provide more enhanced disclosures regarding their 
operations, and described specific disclosures that the Commission 
should require of ATSs. SIFMA stated that the Commission ``should 
require broker-dealers to publish on their Web sites, on a monthly 
basis, a standardized disclosure report that provides an overview of 
key macro issues that are of interest to clients,'' including, among 
other things, ``order types supported on the broker-dealer's ATS (if 
applicable).'' \184\ Blackrock, Inc. expressed the view that although 
some ATSs voluntarily publish their Form ATS filings and supplemental 
materials, the ``particular operational features specified and degree 
of detail lack consistency from one [Form ATS] submission to another'' 
and that ``[a]dditional standardization and information are required in 
disclosures about ATS practices.'' \185\ Blackrock further stated that 
``[m]andatory ATS disclosures should include greater detail on how the 
platform calculates reference prices, determines order priority, 
matches orders between client segments, monitors execution quality, 
advertises orders, interacts with affiliates and is compensated by 
subscribers.'' \186\ The Consumer Federation of America stated 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.'' \187\ The 
Consumer Federation of America further opined that ``the Commission 
should undertake an exhaustive investigation of the current order 
types, requiring exchanges and all ATSs, including dark pools, to 
disclose in easily understandable terms what their purpose is, how they 
are used in practice, who is using them, and why they are not 
discriminatory or resulting in undue benefit or harm to any traders.'' 
\188\
---------------------------------------------------------------------------

    \184\ SIFMA letter #2, supra note 175, at 13.
    \185\ Blackrock letter, supra note 175, at 4.
    \186\ Id.
    \187\ Consumer Federation of America letter, supra note 175, at 
22.
    \188\ Id. at 37-38.
---------------------------------------------------------------------------

    Bloomberg Tradebook LLC noted that buy-side representatives with 
whom it met at a workshop for members of equity trading desks of asset 
managers stated that although they periodically send questionnaires to 
their brokers regarding order handling and internalization (dark pool) 
matching protocols, because the buy-side representatives might not be 
customers of all ATSs, they could not assess order interaction that 
occurs across the market structure.\189\ Bloomberg Tradebook also 
recommended that the Commission ask exchanges and ATSs to complete a 
questionnaire with ``Yes'' and ``No'' checkboxes that would provide an 
overview of each exchange's or ATS's operations, and which Bloomberg 
Tradebook suggested could be posted on the Commission's Web site. 
Bloomberg Tradebook provided a sample questionnaire that included 
questions relating to, among other things, affiliations, riskless 
principal trades, trades effected in a proprietary capacity, sharing of 
orders or order information with affiliates or other trading venues and 
compensation for such sharing, operation of a smart order router and 
whether it gives preference to the exchange or ATS or an affiliate, 
priority rules, order types that enable customers to gain preference, 
and special fees or rebates which lead to a preference of one order 
over another.\190\
---------------------------------------------------------------------------

    \189\ Bloomberg Tradebook letter, supra note 175, at 1.
    \190\ Id. at 2-3.
---------------------------------------------------------------------------

    Goldman Sachs recommended an enhanced disclosure regime for 
exchanges and ATSs consisting of four components. First, exchanges and 
ATSs would be required to ``provide descriptions of the types of 
functionalities that they provide, such as types of orders (e.g., 
flash/pinging orders, conditional orders), services (e.g., co-location, 
special priority), and data (e.g., depth-of-book quotations, per order 
information).'' Second, they would ``disclose the basis upon which 
members/subscribers access the type of order, service or data,'' and 
``whether only a certain class of market participants has access.'' 
Third, they would be required to disclose how commonly the 
functionality is used. Fourth, the exchanges and ATSs would disclose 
more market quality statistics ``so that investors and other market

[[Page 81014]]

participants could better gauge execution quality.'' \191\
---------------------------------------------------------------------------

    \191\ Goldman Sachs letter, supra note 175, at 9-10.
---------------------------------------------------------------------------

    Lime Brokerage, LLC recommended that the Commission should require 
``transparency around pricing, access criteria and membership of dark 
pools.'' \192\ Managed Funds Association stated that ``as long as co-
location is available to investors, traders and larger brokers on an 
equal basis, the secondary market for such services to smaller 
customers from their brokers should be competitive and thus, fairly 
priced,'' and therefore, ``we believe market centers should disclose if 
they or third parties offer co-location services on a priority basis 
other than first available.'' \193\ SIFMA stated its belief that 
``added disclosure about co-location and other market access 
arrangements would be beneficial to market participants,'' and that 
``[s]uch disclosure might describe standard, high speed, co-location, 
or other means by which members may access an exchange or ATS, and 
provide market participants with details regarding the categories of 
market participants that use each means of access, the data capacity 
associated with each arrangement, and the quotation and transaction 
volume attributable to each arrangement.'' \194\
---------------------------------------------------------------------------

    \192\ Lime Brokerage letter, supra note 175, at 7.
    \193\ Managed Funds Association letter, supra note 175, at 27.
    \194\ SIFMA letter #1, supra note 175, at 7.
---------------------------------------------------------------------------

    Southeastern Asset Management, Inc. commented that brokers and 
trading venues should disclose to investors information such as 
payments, rebates, and fees related to execution venues, venue rankings 
by routing brokers and routing venues, and the inputs that create the 
routing rankings, and the transparency of customer specific order 
routing and execution available to the specific customer.\195\ 
Liquidnet recommended that institutional ATSs make similar disclosures 
to those it recommended when commenting on the Regulation of Non-Public 
Interest proposing rules and amendment to joint-industry plans.\196\
---------------------------------------------------------------------------

    \195\ See Southeastern Asset Management letter, supra note 175, 
at 7.
    \196\ See Liquidnet letter #2, supra note 175, at F-1-F-2; see 
also supra note 129.
---------------------------------------------------------------------------

    In addition to the ten commenters that provided specific Form ATS 
disclosure recommendations, one commenter provided some examples of 
customer questions and requests specific to dark pools that it 
received. Such questions and requests related to, among other things, 
whether the commenter's dark pool is truly dark, categorization or 
tagging of order flow, whether participants may opt out of or into 
interaction with certain flow, proprietary orders interaction with the 
dark pool, priority rules, requests to exclude certain types of venues 
for routing of orders, maintenance of confidential trading information, 
use of direct market data feeds by the dark pool's servers and 
algorithmic strategies, and co-location of servers and algorithmic 
strategies to exchange and ATS servers.\197\ The commenter also 
provided some sample questions for its clients to ask of their dark 
pool providers. These included questions relating to the dark pools 
methods of access, client/subscriber base, types of orders permitted, 
matching of dark pool orders at the NBBO, price improvement, 
interaction of the dark pool's principal and proprietary orders with 
client orders on the dark pool, categorization or tagging of order 
flow, and order types.\198\ The commenter also included several 
questions that clients should ask dark pools about the sell-side 
broker-dealers and exchanges that the dark pools access.
---------------------------------------------------------------------------

    \197\ See Morgan Stanley letter, supra note 175, at 12-14. 
Additionally, representatives from Morgan Stanley met with staff 
from the Commission's Division of Trading and Market to discuss 
market structure issues. During that meeting, Morgan Stanley 
provided, among other things, examples of frequently asked questions 
that it believes could be standardized to provide mandated 
transparency about how orders are handled on dark pools. See 
Memorandum from the Division of Trading and Markets regarding an 
October 1, 2015, meeting with representatives of Morgan Stanley, 
https://www.sec.gov/comments/s7-02-10/s70210.shtml.
    \198\ See Morgan Stanley letter, supra note 175.
---------------------------------------------------------------------------

    In response to the questions the Commission raised in the Equity 
Market Structure Release, one commenter raised questions relating to 
the transparency of ATSs' operations. The commenter asked, among other 
things, whether:
     Form ATS filings provide the Commission with complete and 
timely information about the operation of ATSs, and whether such 
filings are sufficiently frequent and detailed to allow the Commission 
to understand planned system changes by ATSs;
     the Commission has adequate tools to respond to concerns 
about the operations of ATSs;
     the Commission has adequate information about the 
relationships between ATSs and their subscribers, including how 
``toxicity'' ratings are assigned to subscribers, and their impact on 
individual subscriber's access and fees, and whether it is acceptable 
that ATS subscribers can assign such ratings to counterparties within 
and outside the ATS without disclosing objective criteria;
     the Commission has adequate information about ATS pricing, 
noting that but for the Rule 3a1-1 exemption from exchange 
registration, ATSs would be required to charge fees that are fair and 
not unreasonably discriminatory; and
     the Commission receives enough information from ATSs about 
their access policies to make comprehensive assessment about 
competitive dynamics at work in the market.\199\
---------------------------------------------------------------------------

    \199\ See Nasdaq OMX letter, supra note 175, at 14-16.
---------------------------------------------------------------------------

    The commenter stated its belief that responding to the Commission's 
questions in the Equity Market Structure Release with the commenter's 
own responsive questions was ``entirely appropriate'' because the 
``public cannot comment on the adequacy of Form ATS filings,'' and 
therefore, ``the Commission and its staff are uniquely qualified to 
assess whether the requirements of the Form and the content of actual 
submitted filings provide adequate and timely information.'' \200\
---------------------------------------------------------------------------

    \200\ Id. at 16.
---------------------------------------------------------------------------

    One commenter discussed a May 2009 Opinion Research Corporation 
survey of 284 executives from NYSE-listed companies, noting that only 
17% of the executives were satisfied with the transparency of trading 
in their company's stock, and that 69% of the executives ``indicated 
there is inadequate regulatory oversight of non-exchange trading 
venues, including dark pools.'' \201\
---------------------------------------------------------------------------

    \201\ NYSE Euronext letter #2, supra note 175, at 7.
---------------------------------------------------------------------------

    Five commenters expressed the view that Form ATS filings should be 
made publicly available. SIFMA opined that ``[t]o enhance transparency 
and confidence, all ATSs should publish the Form ATS and make their 
forms available on their Web sites.'' \202\ Blackrock stated that 
current and historical Form ATS filings for active ATSs ``should be 
made immediately available to the public, subject to appropriate 
redaction of confidential information,'' noting that some ATS operators 
``have already displayed exemplary transparency by voluntarily 
publishing their Form ATS filings and supplemental materials.'' \203\ 
The Consumer Federation of America stated its support for requiring all 
ATSs, including dark pools, to publicly disclose their Forms ATS ``so 
that the public can see how these venues operate.'' \204\ KOR Group LLC 
opined that the fact that ``ATS filings are hidden from the public 
while the burden is on SROs to file publicly . . . does not serve the 
public interest in any

[[Page 81015]]

way, and makes it easy for media and others to sensationalize and 
demonize what is occurring in this part of the market,'' further 
opining that there ``should not be any reasoned argument against'' 
making Form ATS publicly available.\205\ Goldman Sachs recommended 
disclosing Form ATS publicly because ``[s]uch disclosure would provide 
investors with useful information regarding the business practices of 
ATSs,'' and supported a requirement for ``ATSs to provide public notice 
of material changes to their business practices,'' but also stated its 
opposition to ``any requirement that ATSs disclose information about 
their matching algorithms or the nature of their subscribers'' because 
such disclosure ``could result in information leakage that would 
detrimentally impact liquidity.'' \206\ James J. Angel commented that 
Form ATS should be publicly available on the Commission's Electronic 
Data Gathering, Analysis, and Retrieval System (``EDGAR'').\207\ As it 
had done when commenting on the Regulation of Non-Public Interest 
proposing rules and amendment to joint-industry plans,\208\ Liquidnet 
recommended that ATS filings with the Commission be made publicly 
available.\209\
---------------------------------------------------------------------------

    \202\ SIFMA letter #2, supra note 175, at 13.
    \203\ Blackrock letter, supra note 175, at 4.
    \204\ Consumer Federation of America letter, supra note 175, at 
22.
    \205\ KOR Group letter, supra note 175, at 12.
    \206\ Goldman Sachs letter, supra note 175, at 10.
    \207\ See Angel letter, supra note 175, at 13.
    \208\ See Liquidnet letter #1 supra note 166.
    \209\ See Liquidnet letter #2, supra note 175, at F-8.
---------------------------------------------------------------------------

    Three commenters expressed their opposition to enhanced regulation 
of ATSs. Scottrade, Inc. stated it believed that ATSs had ``brought 
innovation and better execution quality to the equity markets,'' and 
that it ``would not be in favor of additional regulation that would 
reduce competition, raise barriers to entry for ATSs or force orders to 
be routed to specific destinations.'' \210\ Bloomberg L.P. stated that 
it had ``heard exchanges argue it would be in the interest of the 
exchanges to regulate ATSs more aggressively,'' but that it had ``not 
seen evidence why that which is in the exchanges' interest is 
necessarily in the public interest,'' and suggested that the Commission 
should ``look to investors' needs,'' which Bloomberg L.P. thought ``do 
not . . . justify increasing the regulatory burdens on alternative 
trading systems.'' \211\ BNY ConvergEx Group stated its belief that 
``the current system of ATS regulation works well and structural 
changes are not necessary,'' and that because ``[d]ark ATSs market 
their services to institutional customers and prospective customers on 
a continuous basis . . . institutions know full well what types of 
customers each ATS caters to and the services they offer.'' \212\ BNY 
ConvergEx Group acknowledged that ``some retail investors may not 
understand precisely how dark ATSs operate,'' but opined that ``[a]ny 
perceived lack of information for retail investors about an ATS's 
trading services would only become an issue if the ATS was to become 
subject to the Fair Access provisions of Regulation ATS,'' and that 
``because retail investors are unlikely to pass the objective credit 
and other financial standards that would be required under a Fair 
Access regime to become subscribers of the ATS, this may not be a real 
issue.'' \213\
---------------------------------------------------------------------------

    \210\ Scottrade letter, supra note175, at 4.
    \211\ Bloomberg L.P. letter, supra note175, at 4-5.
    \212\ BNY ConvergEx Group letter, supra note175, at 18, 21.
    \213\ See id. at 21.
---------------------------------------------------------------------------

    The Commission received two comment letters on its Market Structure 
Web site relevant to the Commission's proposal to amend Regulation 
ATS.\214\
---------------------------------------------------------------------------

    \214\ See Blackrock letter, supra note 175; letter from John C. 
Nagel, Managing Director and Senior Deputy Counsel, Citadel LLC, 
dated July 21, 2014 (``Citadel letter''). See also Securities and 
Exchange Commission Market Structure Web site (``Market Structure 
Web site''), http://www.sec.gov/marketstructure/.
---------------------------------------------------------------------------

    Blackrock submitted the same comment letter to the Market Structure 
Web site that it submitted with respect to the 2010 Equity Market 
Structure Release.\215\ Citadel expressed the view that ``dark pools 
should be subject to increased transparency,'' and that ``ATS 
operational information and filings should be publicly available.'' 
\216\
---------------------------------------------------------------------------

    \215\ See Blackrock letter, supra notes 175, 185, 186, and 203 
and accompanying text.
    \216\ See Citadel letter, supra note 214, at 4.
---------------------------------------------------------------------------

    The Commission has considered these comments, and, for the reasons 
set forth throughout this release, is proposing the amendments to 
Regulation ATS and Exchange Act Rule 3a1-1 as described herein.

IV. Proposed Amendments to Regulation ATS and Rule 3a1-1 to Heighten 
Regulatory Requirements for ATSs That Transact in NMS Stocks

A. Proposed Definition of NMS Stock ATS

    The Commission is proposing to amend Rule 300 of Regulation ATS to 
provide for the definition of ``NMS Stock ATS'' in a new paragraph (k). 
The purpose of proposed Rule 300(k) is to specify the type of ATS that 
would be subject to the heightened conditions under Exchange Act Rule 
3a1-1, as described further below. Proposed Rule 300(k) would define 
``NMS Stock ATS'' to mean an ``an alternative trading system, as 
defined in Exchange Act Rule 300(a), that facilitates transactions in 
NMS stocks, as defined in Exchange Act Rule 300(g).'' \217\ Rule 300(g) 
of Regulation ATS currently provides, and would continue to provide, 
that the term ``NMS stock'' has the meaning provided in Exchange Act 
Rule 600 of Regulation NMS; provided, however, that a debt or 
convertible debt security shall not be deemed an NMS stock for purposes 
of Regulation ATS.\218\ Pursuant to Exchange Act Rule 600(b), an NMS 
stock is any NMS security other than an option,\219\ and an NMS 
security is ``any security or class of securities for which transaction 
reports are collected, processed, and made available pursuant to an 
effective transaction reporting plan, or an effective national market 
system plan.'' \220\ Thus, under the proposed amendment to Regulation 
ATS, an NMS Stock ATS would include

[[Page 81016]]

any ATS that effects transactions in securities that are listed on a 
national securities exchange (other than options, debt or convertible 
debt). In addition, to meet the definition of an NMS Stock ATS, the 
organization, association, person, group of persons or system must meet 
the definition of an alternative trading system under Rule 300(a) of 
Regulation ATS.\221\
---------------------------------------------------------------------------

    \217\ See proposed Rule 300(k).
    \218\ See 17 CFR 242.300(g).
    \219\ See 17 CFR 242.600(b)(47).
    \220\ See 17 CFR 242.600(b)(46). Transaction reports for 
securities that are listed and registered, or admitted to unlisted 
trading privileges on a national securities exchange, are collected, 
processed, and made available pursuant to the Consolidated Tape 
Association (``CTA'') plan (``CTA Plan'') and the OTC/UTP Plan. See, 
e.g., CTA Plan (dated as of October 1, 2013), https://www.ctaplan.com/publicdocs/ctaplan/notifications/plans/trader-update/5929.pdf at 34 (describing the types of securities to which 
the CTA plan applies).
    See also Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchange on an Unlisted Trading Privilege Basis, http://web.archive.org/web/20070114023844/http://www.utpdata.com/docs/UTP_PlanAmendment.pdf at 2, 10-13 (``OTC/UTP Plan'') (describing the 
securities for which transaction information is collected and 
disseminated as any Nasdaq Global Market or Nasdaq Capital Market 
security, as defined in then-operative NASDAQ Rule 4200). Nasdaq 
Rule 5005(a)(26) defines Nasdaq Global Market security as: Any 
security listed on Nasdaq that (1) satisfies all applicable 
requirements of the Rule 5100 and 5200 Series and meets the criteria 
set forth in the Rule 5400 Series; (2) is a right to purchase such 
security; (3) is a warrant to subscribe to such security; or (4) is 
an Index Warrant which meets the criteria set forth in Rule 5725(a). 
Nasdaq Rule 5005(a)(28) defines Nasdaq Capital Market security as: 
Any security listed on The Nasdaq Capital Market that (1) satisfies 
all applicable requirements of the Rule 5100, 5200 and 5500 Series 
but that is not a Nasdaq Global Market security; (2) is a right to 
purchase such security; or (3) is a warrant to subscribe to such 
security.
    These plans are filed with, and approved by, the Commission in 
accordance with the requirements of Rule 608 of Regulation NMS, and 
pursuant to Rule 601 of Regulation NMS, which requires every 
national securities exchange to ``file a transaction reporting plan 
regarding transactions in listed equity and Nasdaq securities 
executed through its facilities'' and every national securities 
association to ``file a transaction reporting plan regarding 
transactions in listed equity and Nasdaq securities executed by its 
members otherwise than on a national securities exchange.''
    \221\ 17 CFR 242.300(a).
    As it did in the Regulation ATS Adopting Release, the Commission 
notes that whether the actual execution of the order takes place on 
the system is not a determining factor of whether a system falls 
under Rule 3b-6. A trading system that falls within the Commission's 
functional definition of ``exchange'' pursuant to Rule 3b-6 will 
still be an ``exchange,'' even if it matches two trades and routes 
them to another system or exchange for execution. See Regulation ATS 
Adopting Release, supra note 7, at 70851-70852.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed definition of NMS 
Stock ATS. In particular, the Commission solicits comment on the 
following:
    1. Do you believe the Commission should adopt a more limited or 
expansive definition of NMS Stock ATS? Why or why not? Please support 
your arguments.
    2. Should the Commission create the NMS Stock ATS category? Why or 
why not? Please support your arguments.
    3. Should the Commission modify its proposed definition in any way? 
If so, in what way and why? If not, why not? Please support your 
arguments.

B. Rule 3a1-1(a)(2): Proposed Amendments to the Exemption From the 
Definition of ``Exchange'' for NMS Stock ATSs

    Exchange Act Rule 3a1-1(a) exempts from the definition of 
``exchange'': (1) Any alternative trading system operated by a national 
securities association,\222\ (2) any alternative trading system that 
complies with Regulation ATS,\223\ and (3) any alternative trading 
system that under Rule 301(a) of Regulation ATS is not required to 
comply with Regulation ATS.\224\ Most ATSs fall within the second prong 
of Exchange Act Rule 3a1-1 and thus, must comply with Regulation ATS to 
qualify for an exemption from the statutory definition of an 
``exchange.''
---------------------------------------------------------------------------

    \222\ 17 CFR 240.3a1-1(a)(1).
    \223\ 17 CFR 240.3a1-1(a)(2).
    \224\ 17 CFR 240.3a1-1(a)(3).
---------------------------------------------------------------------------

    As discussed in more detail below, the Commission is now proposing 
to expand the conditions with which NMS Stock ATSs would be required to 
comply in order to use the exemption from the definition of 
``exchange.'' To provide for these new conditions, the Commission is 
proposing to amend Rules 3a1-1(a)(2) and (3) to include proposed Rule 
304 within the scope of Regulation ATS.\225\ Amended Rule 3a1-1(a)(2) 
would condition the exemption for any ATS that meets the definition of 
``NMS Stock ATS'' on compliance with Rules 300 through 303 of 
Regulation ATS (except Rule 301(b)(2)) and proposed Rule 304.\226\ The 
Commission is proposing to amend Rule 3a1-1(a)(3) by changing the 
reference to Rule 303 to proposed Rule 304. This is merely a conforming 
change 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. Rule 3a1-1(a)(1), which 
exempts any ATS that is operated by a national securities association, 
is not impacted by the amendments the Commission is proposing today.
---------------------------------------------------------------------------

    \225\ In Exchange Act Rules 3a1-1(a)(2) and (3), Regulation ATS 
is currently defined as ``17 CFR 242.300 through 242.303.'' The 
Commission is proposing to amend these references to Regulation ATS 
to define Regulation ATS as ``17 CFR 242.300 through 242.304.''
    \226\ See infra Section IV.C. Specifically, the Commission is 
proposing to amend Rule 3a1-1(a)(2) by changing the reference to 
Rule 303 to proposed Rule 304. Under the proposal, an NMS Stock ATS 
would not be required to file the reports and amendments that it is 
currently required to file on Form ATS pursuant to Rule 302(b)(2), 
unless the ATS also effects transactions in securities other than 
NMS stock and is not otherwise exempt. See proposed Rule 
301(b)(2)(viii).
---------------------------------------------------------------------------

    The Commission preliminarily believes that amending the conditions 
to the Rule 3a1-1(a) exemption would more appropriately calibrate the 
level of operational transparency between registered national 
securities exchanges and NMS Stock ATSs, which in many regards, are 
functionally similar trading centers, while maintaining the regulatory 
framework that permits NMS Stock ATSs to decide whether to register and 
be regulated as broker-dealers or as national securities 
exchanges.\227\ The Commission notes, as it has in other contexts,\228\ 
that SRO and non-SRO markets, such as NMS Stock ATSs, are subject to 
different regulatory regimes, with a different mix of benefits and 
obligations. Pursuant to this proposal, NMS Stock ATSs would continue 
to be able to choose to register as national securities exchanges or as 
broker-dealers. The Commission is proposing, however, to increase the 
scope of the conditions to the exemption for the purpose of providing 
more transparency around the operations of NMS Stock ATSs and potential 
conflicts of interest resulting from the unique relationship between 
the broker-dealer operator and the NMS Stock ATS, as discussed further 
below. While questions have been raised in other contexts as to whether 
the broader regulatory framework for national securities exchanges and 
ATSs should be harmonized,\229\ the Commission preliminarily believes 
that the proposals are an appropriate response to concerns about the 
need for transparency about the operations of NMS Stock ATSs and 
potential conflicts of interest resulting from the activities of their 
broker-dealer operators and the broker-dealer operators' affiliates. 
The Commission preliminarily believes that the proposals would help 
market participants make better informed decisions about where to route 
their orders for execution; the proposed disclosures would also provide 
the Commission with improved tools to carry out its oversight of NMS 
Stock ATSs. Moreover, as explained above, the Commission is concerned 
that market participants have limited information about the 
increasingly complex operations of NMS Stock ATSs,\230\ and need more 
transparency on NMS Stock ATSs to fully evaluate how their orders are 
handled and executed on NMS Stock ATSs. The Commission preliminarily 
believes that the enhanced disclosures about the operations of NMS 
Stock ATSs elicited by proposed Form ATS-N would provide better 
information about how NMS Stock ATSs operate and, thereby, enable the 
Commission to determine whether additional regulatory changes for 
either or both national securities exchanges and ATSs are necessary.
---------------------------------------------------------------------------

    \227\ See Regulation ATS Adopting Release, supra note 7, at 
70856-70857.
    \228\ See, e.g., SCI Adopting Release, supra note 17, at 72264.
    \229\ See id.
    \230\ See supra Sections III.B and C.
---------------------------------------------------------------------------

    The Commission has considered the alternative of requiring 
different levels of disclosure among NMS Stock ATSs based on 
volume.\231\ However, the Commission preliminarily believes that it is 
necessary and appropriate for the protection of market participants to 
apply the proposed heightened conditions for the Rule 3a1-1(a)(2) 
exemption to all NMS Stock ATSs. The Commission notes that market 
participants may subscribe to multiple ATSs and route orders in NMS 
stocks among various ATSs prior to receiving an execution. The 
Commission preliminarily believes that because orders in NMS stocks may 
be routed to any NMS Stock ATS, regardless of the volume traded on the 
NMS Stock ATS, all market participants would benefit from the 
disclosures provided pursuant to proposed Rule 304. Accordingly, the

[[Page 81017]]

Commission believes that the proposed rules addressing greater 
operational transparency should apply equally to all NMS Stock ATSs.
---------------------------------------------------------------------------

    \231\ See infra Section XIII.D.4.
---------------------------------------------------------------------------

    The Commission requests comment on the scope of the proposed 
amendments to Rules 3a1-1(a)(2) and (3), which would apply the proposed 
new conditions of Rule 304 to all NMS Stock ATSs. In particular, the 
Commission solicits comment on the following:
    4. Do you believe that the current conditions to the exemption from 
the definition of ``exchange'' for NMS Stock ATSs are appropriate in 
light of market developments since Regulation ATS was adopted in 1998? 
Why or why not? Please support your arguments.
    5. Do you believe there is sufficient transparency with respect to 
the operations of NMS Stock ATSs? If not, what information do you 
believe should be disclosed regarding the operations of an NMS Stock 
ATS, how frequently should it be disclosed, and why? Does the need for, 
and availability of, information about the operations of NMS Stock ATSs 
vary among market participants? If so, how? Please explain in detail.
    6. Do you believe there is sufficient transparency with respect to 
the activities of the broker-dealer operator and its affiliates in 
connection with NMS Stock ATSs? If not, what information do you believe 
should be disclosed regarding the activities of the broker-dealer 
operator and its affiliates and why? Does the need for, and 
availability of, information about the activities of the broker-dealer 
operator and its affiliates vary among market participants? If so, how? 
Please explain in detail.
    7. Should the Commission adopt the proposal to apply the 
requirements of proposed Rule 304 to all NMS Stock ATSs? Why or why 
not? Please support your arguments.
    8. Do you believe that the Commission should provide any exceptions 
to the application of proposed Rule 304 to NMS Stock ATSs seeking to 
operate pursuant to the Rule 3a1-1(a)(2) exemption? Why or why not? For 
example, should the requirements to comply with proposed Rule 304, 
including the disclosure requirements of proposed Form ATS-N, only be 
applicable to NMS Stock ATSs that meet certain thresholds (such dollar 
volume, trading volume, or number of subscribers)? If so, what should 
the threshold be, and why? If not, why not? Please support your 
arguments.
    9. Do you believe that the Commission should require different 
levels of disclosure for any proposed Form ATS-N items based on the NMS 
Stock ATS's volume? If so, why, what should the different thresholds 
be, and which items on proposed Form ATS-N should depend on an NMS 
Stock ATS's volume? If not, why not? Please support your arguments.
    At this time, the Commission preliminarily believes that the above 
operational transparency conditions to the exemption to Exchange Act 
Rule 3a1-1(a) should only apply to NMS Stock ATSs. The Commission, 
however, requests comment and data on whether its preliminary view is 
warranted for each category of non-NMS stock ATS.
    First, approximately 27 ATSs that currently have a Forms ATS on 
file with the Commission disclose that they exclusively trade fixed 
income securities, such as corporate or municipal bonds, and 
approximately 2 ATSs effect transactions in both fixed income 
securities and other securities, including NMS stocks.\232\ Based on 
Commission experience, the equity markets, which are generally highly 
automated trading centers that are connected through routing networks, 
operate and execute orders at rapid speeds using a variety of order 
types. Unlike the complex trading centers of the equity markets, the 
Commission preliminarily believes that fixed income markets currently 
rely less on speed, automation, and electronic trading to execute 
orders and other trading interest,\233\ although that may be changing 
in some fixed income markets such as those that trade certain 
government securities.\234\ Generally, fixed income ATSs offer less 
complex order types to their subscribers than those offered by NMS 
Stock ATSs, sometimes restricting incoming orders to limit orders, and 
the execution of matched interest involves negotiation or a process. In 
addition, the municipal and corporate fixed income markets tend to be 
less liquid than the equity markets, with slower execution times and 
less complex routing strategies.\235\
---------------------------------------------------------------------------

    \232\ Data compiled from Forms ATS and ATS-R submitted to the 
Commission as of November 1, 2015.
    \233\ See SCI Adopting Release, supra note 17, at 72270.
    \234\ See October 15 Staff Report, infra note 247 at 35-36.
    \235\ See SCI Adopting Release, supra note 17, at 72270.
---------------------------------------------------------------------------

    Furthermore, market participants trading fixed income securities 
are typically not comparing transparent trading venues against non-
transparent trading venues in the same manner as market participants 
seeking to execute NMS stock orders. Although two affiliated national 
securities exchanges operate electronic systems for receiving, 
processing, executing, and reporting bids, offers and executions in 
fixed income debt securities,\236\ the Commission preliminarily 
believes that the majority of trading in fixed income securities occurs 
on the bilateral market.\237\ As such, ATSs that effect trades in fixed 
income securities primarily compete against other trading venues with 
limited or no operational transparency requirements or standards. By 
contrast, NMS Stock ATSs, which provide limited information to market 
participants about their operations, compete directly with national 
securities exchanges, which are required to publicly disclose 
information about their operations in the form of proposed rule changes 
and a public rule book. Accordingly, the Commission preliminarily 
believes that any proposed revisions to the disclosure requirements for 
fixed income ATSs under Regulation ATS should be specifically tailored 
to the attributes of the fixed income market and, therefore, may 
require different changes to the current Regulation ATS regime and Form 
ATS than those being proposed herein, which are in direct response to 
specific transparency concerns related to the operational complexities 
of NMS Stock ATSs and market participants' general inability to compare 
NMS Stock ATSs to one another and to national securities exchanges.
---------------------------------------------------------------------------

    \236\ See Securities Exchange Act Release Nos. 55496 (March 20, 
2007) 72 FR 14631 (March 28, 2007) (NYSE-2006-37) (approving the 
establishment of NYSE Bonds as an electronic order-driven matching 
system for debt securities, including, but not limited to corporate 
bonds (including convertible bonds), international bank bonds, 
foreign government bonds, U.S. government bonds, government agency 
bonds, municipal bonds, and debt-based structured products under 
NYSE Rule 86) and 58839 (October 23, 2008) 73 FR 64645 (October 30, 
2008) (NYSEALTR-2008-03) (notice of filing and immediate 
effectiveness of the Exchange's proposal to relocate the Exchange's 
debt trading and adopt NYSEAlternext Equities Rule 86 (now NYSEMKT--
Equities Rule 86) in order to facilitate trading on the system NYSE 
Alternext Bonds system (now NYSEMKT Bonds)).
    \237\ For interdealer trading for ``benchmark'' U.S. Treasury 
securities, however, trading occurs mainly on centralized electronic 
trading platforms using a central limit order book, namely ATSs. See 
October 15 Staff Report, infra note 247 at 11.
---------------------------------------------------------------------------

    The Commission recognizes, however, that trading on fixed income 
ATSs continues to evolve as fixed income securities are increasingly 
being traded on ATSs and that trading is occurring in an automated 
manner. Furthermore, while the specific conflicts of interest that 
might arise on NMS Stock ATSs operated by multiservice broker dealers 
may not be identical to the potential conflicts of interest that might 
arise on

[[Page 81018]]

a fixed income ATS,\238\ the current operations of fixed income ATSs 
may give rise to potential conflicts of interest between the non-ATS 
operations of a broker-dealer operator, or its affiliates, and the 
fixed income ATS. Accordingly, the Commission seeks comment on the 
following:
---------------------------------------------------------------------------

    \238\ For instance, the Commission preliminarily believes that 
non-ATS business units of broker-dealer operators of fixed income 
ATSs may not trade proprietarily on their ATSs to the same extent 
that proprietary trading desks, or other business units, of 
multiservice broker-dealer operators trade on NMS Stock ATSs.
---------------------------------------------------------------------------

    10. Do you believe that market participants have sufficient 
information about the operations of fixed income ATSs to evaluate such 
ATSs as potential trading venues? Why or why not? Please support your 
arguments.
    11. Do you believe that the Commission should apply proposed Rule 
304, in whole or in part, to fixed income ATSs, or some subset of fixed 
income ATSs? Why or why not? If proposed Rule 304 should be applied 
only in part to fixed income ATSs, which parts should be applied and 
why? What, if any, specific modifications or additions to proposed Rule 
304 should be made in any application of it to fixed income ATSs? 
Please support your arguments.
    12. Do you believe that fixed income ATSs raise the same or similar 
operational transparency concerns that the Commission preliminarily 
believes to exist for NMS Stock ATSs? Why or why not? Please support 
your arguments. If not, do you believe that fixed income ATSs raise 
other operational transparency concerns that warrant inclusion of fixed 
income ATSs within the scope of proposed Rule 304? Why or why not? 
Please support your arguments.
    13. Do you believe that there are potential conflicts of interest 
for broker-dealer operators of fixed income ATSs, or their affiliates, 
that may warrant inclusion of fixed income ATSs within the scope of 
proposed Rule 304? Why or why not? Please support your arguments. If 
yes, what are those potential conflicts of interest and how do those 
potential conflicts of interest differ from or resemble the potential 
conflicts of interest for broker-dealer operators of NMS Stock ATSs and 
their affiliates? Please be specific.
    14. Do you believe that the current conditions to the exemption 
from the definition of ``exchange'' are appropriate for fixed income 
ATSs? Why or why not? Please support your arguments.
    15. Do you believe that applying proposed Rule 304 to fixed income 
ATSs would place them at a competitive disadvantage with respect to 
non-ATS trading venues that trade fixed income securities and would not 
be subject to such disclosure requirements? Why or why not? Please 
support your arguments.
    16. Should the Commission adopt a new form that is designed 
specifically to solicit information about the operations of fixed 
income ATSs or the operations of certain types of fixed income ATSs? If 
so, please explain, in detail, the information the new form should 
require. If not, why not? Please support your arguments. Do you believe 
that part or all of any new form designed specifically for fixed income 
ATSs should be made available to the public? Why or why not? Please 
support your arguments.
    As noted above, the Commission recognizes that fixed income 
securities markets continue to evolve as fixed income securities are 
increasingly being traded on ATSs in an automated manner. Thus, under 
the current regulatory requirements, market participants generally do 
not have information about how fixed income ATSs operate as ATSs are 
not otherwise required to publicly disclose such information \239\ and 
Forms ATS filed with the Commission by fixed income ATSs are deemed 
confidential.
---------------------------------------------------------------------------

    \239\ The Commission does note, however, that some ATSs may 
currently make voluntary public disclosures. See, e.g., infra note 
156.
---------------------------------------------------------------------------

    As such, the Commission is seeking public comment on whether it 
should make public current Forms ATS filed by fixed income ATSs. Though 
the solicitations on current Form ATS are not specifically tailored to 
fixed income ATSs like proposed Form ATS-N would be tailored to NMS 
Stock ATSs, market participants could use the information to assess and 
compare fixed income ATSs when deciding where to trade fixed income 
securities. The Commission is cognizant, however, that fixed income 
ATSs currently file Form ATS with the understanding that the Form ATS 
is deemed confidential and thus, a fixed income ATS may not have chosen 
to operate as an alternative trading system if its Form ATS filing was 
originally intended to be made public. In response to any change in the 
regulatory requirements, a fixed income ATS may change its business 
model and choose to curtail its activities or cease operating as an 
ATS.
    Accordingly, the Commission seeks comment on the following:
    17. Do you believe that the current Forms ATS initial operation 
report, or parts thereof, filed by fixed income ATSs should be made 
available to the public? Why or why not? Please support your arguments.
    18. Do you believe that amendments to Form ATS initial operation 
reports, or parts thereof, filed by fixed income ATSs should be made 
available to the public? Why or why not? Please support your arguments.
    19. Do you believe that current Form ATS is sufficient to elicit 
useful information about the operations of fixed income ATSs? If so, 
why? If not, in what ways should Form ATS be modified to better inform 
the Commission about the operations of fixed income ATSs? Please 
explain in detail the manner in which Form ATS should be modified for 
fixed income ATSs.
    20. Do you believe that fixed income ATSs may curtail or cease 
operations if the Commission rescinded the confidential treatment of 
Form ATS and made Forms ATS filed by fixed income ATSs public? Why or 
why not? Please support your arguments.
    21. Do you believe that if fixed income ATSs curtail or cease 
operations in response to the Commission rescinding the confidentiality 
of the Form ATS, the limitation or exit of those ATSs from the fixed 
income market would impact the quality of the fixed income markets in 
any way? Why or why not? Please support your arguments.
    The questions above relate to all fixed income securities, but the 
Commission is also interested in learning commenters' specific views 
about whether ATSs that effect transactions in fixed income securities 
that are government securities, as defined under the Exchange Act,\240\ 
should be subject to increased regulation, operational transparency 
requirements, or both. Under Rule 301(a)(4) of Regulation ATS, an ATS 
that solely trades government securities and is registered as a broker-
dealer or is a bank is exempt from the requirement to either register 
as a national securities exchange or comply with Regulation ATS.\241\ 
If an ATS trades both government securities and non-government 
securities--such as NMS stocks, corporate or municipal fixed income 
securities--it must either register as a national securities exchange 
or comply with Regulation ATS. However, these ATSs are not subject to 
several requirements under Regulation ATS with regard to their trading 
in government securities. First, ATSs that

[[Page 81019]]

do not trade NMS stocks are not subject to the order display and 
execution access provisions under Rule 301(b)(3).\242\ Additionally, 
the government securities activities of ATSs that trade both government 
and other securities are not subject to either the fair access 
provisions of Rule 301(b)(5) \243\ or the capacity, integrity, and 
security of automated systems provisions under Rule 301(b)(6).\244\
---------------------------------------------------------------------------

    \240\ See 15 U.S.C. 78c(a)(42) (defining ``government 
securities'' as, among other things, ``securities which are direct 
obligations of, or obligations guaranteed as to principal or 
interest by, the United States'').
    \241\ See 17 CFR 242.301(a)(4)(i) and (ii)(A).
    \242\ See supra notes 86-90 and accompanying text.
    \243\ See supra notes 92-94 and accompanying text.
    \244\ See supra notes 96-97 and accompanying text.
---------------------------------------------------------------------------

    Pursuant to the Exchange Act (particularly the provisions of the 
Government Securities Act of 1986, as amended \245\) and federal 
banking laws, brokers and dealers in the government securities market 
are regulated jointly by the Commission, the United States Department 
of the Treasury (``U.S. Treasury Department''), and federal banking 
regulators.\246\ Recently, staff members from the U.S. Treasury 
Department, the Board of Governors of the Federal Reserve System, the 
Federal Reserve Bank of New York, the Commission, and the U.S. 
Commodity Futures Trading Commission issued a joint report about the 
unusually high level of volatility and rapid round-trip in prices that 
occurred in the U.S. Treasury market on October 15, 2014 (the ``October 
15 Staff Report'').\247\ The October 15 Staff Report discusses the 
conditions that contributed to the October 15, 2014 developments and 
key findings from the analysis of data from that day.
---------------------------------------------------------------------------

    \245\ See Public Law 99-571, October 28, 1986, and Public Law 
103-202, December 17, 1993.
    \246\ The Government Securities Act authorized the U.S. Treasury 
Department to promulgate rules governing transactions in government 
securities by government securities brokers and dealers. See October 
15 Staff Report, infra note 247, at 9. The Commission, FINRA, and 
federal bank regulators--in consultation with the U.S. Treasury 
Department--also have the authority to issue sales practice rules 
for the government securities secondary market. See id.
    \247\ See Joint Staff Report: The U.S. Treasury Market on 
October 15, 2014 (July 13, 2015) (the ``October 15 Staff Report''), 
http://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf.
---------------------------------------------------------------------------

    The October 15 Staff Report also provides an overview of the market 
structure, liquidity, and applicable regulations of the U.S. Treasury 
market, as well as the broad changes to the structure of the U.S. 
Treasury market that have occurred over the past two decades.\248\ For 
the secondary market in cash U.S. Treasury securities (``Treasury 
securities''), the October 15 Staff Report explains that trading 
occurs: (1) In bilateral transactions via voice or a variety of 
electronic means; or (2) on centralized electronic trading platforms 
using a central limit order book.\249\ The October 15 Staff Report 
notes that the structure of the U.S. Treasury market has ``evolved 
notably in recent years'' and electronic trading has become an 
increasingly important feature of the modern interdealer market for 
Treasury securities.\250\ Like modern-day trading in NMS stocks, the 
majority of interdealer trading in benchmark Treasury securities,\251\ 
which is the most liquid type of Treasury security, currently occurs on 
centralized electronic trading platforms using a central limit order 
book, namely ATSs.\252\
---------------------------------------------------------------------------

    \248\ See October 15 Staff Report, supra note 247, at 8-14, 35-
44.
    \249\ See id. at 11.
    \250\ See id. at 35.
    \251\ Benchmark issues are the most recently issued nominal 
coupon securities. See id. at 11. Nominal coupon securities pay a 
fixed semi-annual coupon and are currently issued at original 
maturities of 2, 3, 5, 7, 10, and 30 years. See id. at 11, n.6.
    \252\ See id. at 11, 35-36. The October 15 Staff Report also 
notes that the majority of interdealer trading of ``seasoned'' 
Treasury securities and the majority of dealer-to-customer trading 
is via bilateral transactions. See id. at 11, 35-36 n.31.
---------------------------------------------------------------------------

    The October 15 Staff Report notes that the growth in high-speed 
electronic trading has contributed to the growing presence of Principal 
trading firms (``PTFs'') in the Treasury market, with these firms 
accounting for the majority of trading and providing the vast majority 
of market depth.\253\ PTFs, which have direct access to electronic 
trading platforms for Treasury securities, now represent more than half 
of the trading activity on electronic interdealer trading platforms for 
Treasury securities.\254\ Similar to HFTs in the equity markets, PTFs 
trading on the electronically brokered interdealer market for Treasury 
securities often employ automated algorithmic trading strategies that 
rely on speed and allow the PTFs to cancel or modify existing quotes in 
response to perceived market activity.\255\ Furthermore, most PTFs 
trading Treasury securities on electronic platforms also restrict their 
activities to proprietary trading and do not hold long positions.\256\
---------------------------------------------------------------------------

    \253\ See id. at 36.
    \254\ See id.
    \255\ See id. at 32, 35-36, 39.
    \256\ See id. at 38.
---------------------------------------------------------------------------

    The October 15 Staff Report also notes that increased trading speed 
due to automated trading in the U.S. Treasury market has challenged the 
traditional risk management protocols for market participants, trading 
platforms, and clearing firms.\257\ The October 15 Staff Report notes 
that automated trading can occur at speeds that exceed the capacity of 
manual detection and intervention, posing a challenge to traditional 
risk management protocols, and forcing market participants, trading 
platforms, and clearing firms to develop internal risk controls and 
processes to manage the potential for rapidly changing market and 
counterparty risk exposures.\258\
---------------------------------------------------------------------------

    \257\ See id. at 36.
    \258\ See id. at 36-37.
---------------------------------------------------------------------------

    As indicated in the October 15 Staff Report, the staff of the U.S. 
Treasury Department, the Board of Governors of the Federal Reserve 
System, the Federal Reserve Bank of New York, the Commission, and the 
U.S. Commodity Futures Trading Commission plan to continue to analyze 
the events of October 15, 2014 and examine changes to the U.S. Treasury 
market structure. The October 15 Staff Report identified four areas for 
further work. One of the four areas includes the continued monitoring 
of trading and risk management practices across the U.S. Treasury 
market and a review of the current regulatory requirements applicable 
to the government securities market and its participants.\259\ In 
connection with this, the cross-agency staff expressed support for a 
review of the current regulatory requirements applicable to the 
government securities market and its participants and suggested 
studying the implications of a registration requirement for firms 
conducting certain types of automated trading in the U.S. Treasury 
market and for government securities trading venues.\260\ The staff 
also recommended an assessment of the data available to the public and 
to the official sector on U.S. Treasury cash securities markets, which 
would include efforts to enhance public reporting on U.S. Treasury 
market venue policies and services.\261\
---------------------------------------------------------------------------

    \259\ See id. at 45.
    \260\ See id. at 47.
    \261\ See id. at 48.
---------------------------------------------------------------------------

    Based on the rapid and continued evolution of the market for 
government securities, the Commission is seeking comment on whether as 
part of its continued cooperation and coordination with other 
regulators, it should include ATSs whose trading activity is solely in 
government securities within the scope of current Regulation ATS and 
amend Regulation ATS to provide for enhanced operational transparency 
for ATSs that trade government securities.\262\

[[Page 81020]]

Specifically, the Commission seeks comment on the following:
---------------------------------------------------------------------------

    \262\ Prior to adopting any changes to Regulation ATS with 
regard to ATSs that trade government securities, the Commission 
would, as appropriate, consult with and consider the views of the 
Secretary of the Treasury and any other appropriate regulatory 
agencies. See 15 U.S.C. 78o(c)(2)(E).
---------------------------------------------------------------------------

    22. Do you that believe market participants have sufficient 
information about the operations of ATSs that effect transactions in 
government securities in order to evaluate such ATSs as potential 
trading venues? Why or why not? Please support your arguments.
    23. Do you believe that the Commission should adopt amendments to 
Regulation ATS to remove the exemption under Rule 301(a)(4)(ii)(A) of 
Regulation ATS for ATSs whose trading activity is solely in government 
securities? Why or why not? Please support your arguments. If so, do 
you believe that the Commission should make public Form ATS filings or 
otherwise increase the transparency requirements under Regulation ATS 
for ATSs whose sole trading activity is in government securities? Why 
or why not? Please support your arguments.
    24. Do you believe that the Commission should adopt amendments to 
Regulation ATS to enhance the transparency requirements applicable to 
ATSs that effect transactions in both government securities and non-
government securities? Why or why not? If so, how? Please support your 
arguments.
    25. Do you believe that ATSs that effect transactions in government 
securities raise the same operational transparency concerns that the 
Commission preliminarily believes to exist for NMS Stock ATSs? Why or 
why not? Please support your arguments. If not, do you believe that 
ATSs that effect transactions in government securities raise other 
operational transparency concerns that warrant expanding the scope of 
Regulation ATS to encompass ATSs whose sole trading activity is in 
government securities or increasing the transparency requirements for 
ATSs that effect transactions in both government securities and non-
government securities? Why or why not? Please support your arguments.
    26. Do you believe that there are potential conflicts of interest 
for broker-dealer operators of ATSs, or their affiliates, that effect 
transactions in government securities that may justify greater 
operational transparency for ATSs that effect transactions in 
government securities? Why or why not? Please support your arguments. 
If yes, what are those potential conflicts of interest and how do those 
potential conflicts of interest differ from or resemble the potential 
conflicts of interest for broker-dealer operators of NMS Stock ATSs and 
their affiliates? Please be specific.
    27. Do you believe that current Form ATS is sufficient to elicit 
information about the operations of ATSs that effect transactions in 
government securities? If not, in what ways should Form ATS be modified 
to better inform the Commission about the operations of ATSs that 
effect transactions in government securities? Please explain in detail 
the manner in which Form ATS should be modified. Do you believe that 
the current Forms ATS, or parts thereof, for ATSs that effect 
transactions in government securities and non-government securities 
should be made available to the public? Why or why not? Please support 
your arguments.
    28. Do you believe that the Commission should adopt amendments to 
existing rules under Regulation ATS, including, Rules 301(b)(3) (order 
display and execution access), 301(b)(5) (fair access), and 301(b)(6) 
(capacity, integrity, and security of automated systems), to make those 
rules applicable to trading in government securities on ATSs? Why or 
why not? If so, how? Please provide support for your arguments. Should 
the Commission adopt amendments to Rule 301(b)(3) of Regulation ATS to 
require ATSs that trade government securities to report quotes and/or 
trade information for public dissemination after crossing certain 
volume thresholds in a government security? Should such information be 
reported only after a delay? Why or why not? Please support your 
arguments.
    29. Do you believe that the Commission should apply proposed Rule 
304, in whole or in part, to ATSs that effect transactions in 
government securities? Why or why not? Please support your arguments.
    30. Do you believe that the Commission should adopt a new form that 
is specifically designed to solicit information about the operations of 
ATSs that effect transactions in government securities? If so, please 
explain, in detail, the information the new form should require from 
ATSs that effect transactions in government securities. If not, why 
not? Please support your arguments. Do you believe that any new form 
designed specifically for ATSs that effect transactions in government 
securities should be made available to the public? Why or why not? 
Please support your arguments.
    31. Do you believe that broker-dealers that effect transactions in 
government securities may modify their business models in order to need 
not comply with Regulation ATS in response to enhanced regulatory or 
operational transparency requirements for ATSs that effect transactions 
in government securities? Why or why not? Please support your 
arguments.
    There are also ATSs whose activity is solely the facilitation of 
trading in OTC Equity Securities.\263\ At this time, the Commission 
preliminarily believes that many of its specific concerns related to 
the current operations of NMS Stock ATSs, which proposed Rule 304 and 
proposed Form ATS-N seek to address directly, are not equally 
applicable to OTC Equity Securities ATSs. The Commission preliminarily 
believes that OTC Equity Securities ATSs do not currently operate with 
the same complexities as NMS Stock ATSs. Additionally, trading in OTC 
Equity Securities is almost always facilitated through ATSs, through 
inter-dealer quotation systems that are not ATSs,\264\ or elsewhere in 
the bilateral market. Accordingly, trading in the market for OTC Equity 
Securities is typically facilitated by platforms or amongst market 
participants that are not subject to operational transparency 
requirements comparable to those imposed on national securities 
exchanges (i.e., the self-regulatory organization rule filing process). 
The Commission also preliminarily believes that OTC Equity Securities 
ATSs are evolving and, therefore, the Commission seeks comment on the 
following:
---------------------------------------------------------------------------

    \263\ For the purposes of this analysis and request for comment, 
the Commission is using the term ``OTC Equity Security'' as it is 
defined in FINRA's 6400 rule series for quoting and trading in OTC 
Equity Securities. FINRA defines OTC Equity Security as ``any equity 
security that is not an `NMS stock' as that term is defined in Rule 
600(b)(47) of SEC Regulation NMS; provided, however, that the term 
`OTC Equity Security' shall not include any Restricted Equity 
Security,'' which FINRA defines as ``any equity security that meets 
the definition of `restricted security' as contained in Securities 
Act Rule 144(a)(3).'' See FINRA Rules 6420(f), (k).
    \264\ FINRA Rule 6420 defines an interdealer quotation system as 
``any system of general circulation to brokers or dealers which 
regularly disseminates quotations of identified brokers or 
dealers.'' See FINRA Rule 6420(c). An example of an interdealer 
quotation system is the OTC Bulletin Board that FINRA operates.
---------------------------------------------------------------------------

    32. Do you believe that market participants have sufficient 
information about the operations of OTC Equity Securities ATSs to 
evaluate such ATSs as potential trading venues? Why or why not? Please 
support your arguments.
    33. Do you believe that OTC Equity Securities ATSs raise the same 
operational transparency concerns that the Commission preliminarily 
believes to exist for NMS Stock ATSs? Why or why not? Please support 
your arguments. If not, do you believe that OTC Equity Securities ATSs 
raise other operational transparency concerns that warrant inclusion of 
OTC Equity

[[Page 81021]]

Securities ATSs within the scope of proposed Rule 304? Why or why not? 
Please support your arguments.
    34. Do you believe that there are potential conflicts of interest 
for broker-dealer operators of ATSs, and their affiliates, that 
facilitate transactions in OTC Equity Securities that may justify 
greater operational transparency for OTC Equity Securities ATSs? Why or 
why not? Please support your arguments. If yes, what are those 
potential conflicts of interest and how do those potential conflicts of 
interest differ from or resemble the potential conflicts of interest 
for broker-dealer operators of NMS Stock ATSs and their affiliates? 
Please be specific.
    35. Do you believe that the Commission should apply proposed Rule 
304, in whole or in part, to OTC Equity Securities ATSs? Why or why 
not? Please support your arguments.
    36. Do you believe that applying proposed Rule 304 to OTC Equity 
Securities ATSs would place them at a competitive disadvantage with 
respect to other trading venues that facilitate transactions in OTC 
Equity Securities in the bilateral market, which would not be subject 
to such disclosure requirements? Why or why not? Please support your 
arguments.
    37. Do you believe that current Form ATS is sufficient to elicit 
relevant information about the operations of OTC Equity Securities 
ATSs? If so, why? If not, in what ways should Form ATS be modified to 
better inform the Commission about the operations of OTC Equity 
Securities ATSs? Please explain in detail the manner in which Form ATS 
could be modified. Do you believe that the current filed Forms ATS, or 
parts thereof, for OTC Equity Securities ATSs should be made available 
to the public? Why or why not? Please support your arguments.
    38. Do you believe that the Commission should adopt a new form that 
is designed specifically for OTC Equity Securities ATSs to promote 
operational transparency of such ATSs? If so, please explain, in 
detail, the information the new form should require. If not, why not? 
Please support your arguments. Do you believe that any new form 
designed specifically for OTC Equity Securities ATSs should be made 
available to the public? Why or why not? Please support your arguments.
    Additionally, the Commission notes that there are active ATSs that 
trade in securities other than NMS stocks, fixed income securities, or 
OTC Equity Securities.\265\ For example, an ATS might help match orders 
for options contracts or facilitate trades in cooperative interests or 
membership units in limited liability companies. At this time, the 
Commission does not believe that these ATSs raise the same operational 
transparency concerns as NMS Stock ATSs. The products traded on these 
ATSs are not traded on national securities exchanges and, therefore, 
these ATSs are not competing against platforms with greater 
transparency requirements. Furthermore, the Commission preliminarily 
believes that ATSs that trade in securities other than NMS stocks, 
fixed income securities, or OTC Equity Securities do not currently 
operate with the same complexities as NMS Stock ATSs. For such ATSs, 
however, the Commission seeks comment on the following:
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    \265\ The Commission notes that, based on information provided 
on Forms ATS and ATS-R as of November 1, 2015, 5 ATSs may trade such 
securities.
---------------------------------------------------------------------------

    39. Do you believe that market participants have sufficient 
information about the operations of ATSs that effect or facilitate 
transactions in securities other than NMS stocks, fixed income 
securities, or OTC Equity Securities as potential trading venues? Why 
or why not? Please support your arguments.
    40. Do you believe that ATSs that effect or facilitate transactions 
in securities other than NMS stocks, fixed income securities, or OTC 
Equity Securities raise the same operational transparency concerns that 
the Commission preliminarily believes to exist for NMS Stock ATSs? Why 
or why not? Please support your arguments.
    41. Do you believe that there are potential conflicts of interest 
for broker-dealer operators of ATSs, and their affiliates, that effect 
or facilitate transactions in securities other than NMS stocks, fixed 
income securities, or OTC Equity Securities that may justify greater 
operational transparency for ATSs that effect or facilitate 
transactions in securities other than NMS stocks, fixed income 
securities, or OTC Equity Securities? Why or why not? Please support 
your arguments. If yes, what are those potential conflicts of interest 
and how do those potential conflicts of interest differ from or 
resemble the potential conflicts of interest for broker-dealer 
operators of NMS Stock ATSs and their affiliates? Please be specific.
    42. Do you believe that the Commission should apply proposed Rule 
304, in whole or in part, to ATSs that effect or facilitate 
transactions in securities other than NMS stocks, fixed income 
securities, or OTC Equity Securities? Why or why not? Please support 
your arguments. If so, please explain the types of ATSs to which 
proposed Rule 304 should apply and why. If not, why not? Please support 
your arguments.
    43. Do you believe that Form ATS is sufficient to elicit useful 
information about the operations of ATSs that effect or facilitate 
transactions in securities other than NMS stocks, fixed income 
securities, or OTC Equity Securities? If so, why? If not, in what ways 
should Form ATS be modified to better inform the Commission about the 
operations of ATSs that effect or facilitate transactions in securities 
other than NMS stocks, fixed income securities, or OTC Equity 
Securities? Please explain in detail the manner in which Form ATS could 
be modified. Do you believe that current filed Forms ATS, or parts 
thereof, for ATSs that effect or facilitate transactions in securities 
other than NMS stocks, fixed income securities, or OTC Equity 
Securities should be made available to the public? Why or why not? 
Please support your arguments.
    44. Do you believe that the Commission should adopt a new form 
specifically designed for ATSs that effect or facilitate transactions 
in securities other than NMS stocks, fixed income securities, or OTC 
Equity Securities in order to promote operational transparency of such 
ATSs? If so, please explain, in detail, the information the new form 
should elicit from ATSs that effect or facilitate transactions in such 
securities. If not, why not? Please support your arguments. Do you 
believe that any new form designed specifically for ATSs that effect or 
facilitate transactions in securities other than NMS stocks, fixed 
income securities, or OTC Equity Securities should be made available to 
the public? Why or why not? Please support your arguments.

C. Proposed Rule 304: Enhanced Filing Requirements for NMS Stock ATSs

1. Application of Existing Requirements to NMS Stock ATSs
    Proposed Rule 304(a) would require 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), as discussed in Section IV.C.2 below) to be 
exempt from the definition of an exchange pursuant to Rule 3a1-
1(a)(2).\266\ The Commission is not proposing to change Rule 301(a) as 
part of this proposal, but is simply making

[[Page 81022]]

clear that Rule 301(a) continues to apply to NMS Stock ATSs, unless 
otherwise exempt.\267\ Thus, NMS Stock ATSs would still be required to 
comply with the existing requirements of Rules 300 through 303 of 
Regulation ATS, and would additionally be required to comply with 
proposed Rule 304.
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    \266\ As discussed above, the Commission is proposing to amend 
Rule 3a1-1(a) to provide for modified conditions to the exemption 
set forth in proposed Rule 304. See supra Section IV.B.
    \267\ Pursuant to Rule 301(a), certain ATSs that are subject to 
other appropriate regulations are not required to comply with 
Regulation ATS. These ATSs include those that are: Registered as an 
exchange under Section 6 of the Exchange Act; exempt from exchange 
registration based on limited volume; operated by a national 
securities association; registered as a broker-dealer, under 
Sections 15(b) or 15C of the Exchange Act, or that is a bank, that 
limits its securities activities to certain instruments; or 
exempted, conditionally or unconditionally, by Commission order, 
after application by such alternative trading system from one or 
more of the requirements of Rule 301(b). See 17 CFR 242.301(a). See 
also Regulation ATS Adopting Release, supra note 7, at 70859-63.
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    The Commission also notes that the requirements of Rule 301(b) 
(except Rule 301(b)(2)) of Regulation ATS \268\ would continue to apply 
to NMS Stock ATSs. As discussed above, Rule 301(b) sets forth the 
conditions with which an ATS must comply to benefit from the exemption 
provided by Exchange Act Rule 3a1-1(a).\269\ The Commission continues 
to believe that compliance by NMS Stock ATSs with the provisions of 
Rule 301(b) of Regulation ATS (except Rule 301(b)(2)), as amended, is a 
necessary and appropriate condition to the Rule 3a1-1(a)(2) exemption 
from the definition of exchange in that the purpose of such condition 
is the protection of investors.\270\ The Commission would no longer 
require an NMS Stock ATS to comply with the reporting and amendment 
requirements of Rule 301(b)(2) because such conditions would be 
replaced with the more specific disclosure requirements of proposed 
Rule 304 for NMS Stock ATSs, discussed in further detail below. The 
Commission is also proposing to make non-substantive amendments to Rule 
301(b)(2)(i) and Rule 301(b)(2)(vii) \271\ to delete outdated 
references to dates for phased in compliance with Regulation ATS for 
ATSs that were operational as of April 21, 1999, and to update the name 
of the Division of Trading and Markets, respectively.\272\
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    \268\ See 17 CFR 242.301(b)(1), (b)(3)-(11).
    \269\ See supra Section II.B.
    \270\ See, e.g., Regulation ATS Adopting Release, supra note 7, 
at 70856. In adopting the existing conditions in Rule 301, the 
Commission determined that the exemption in Rule 3a1-1 was 
consistent with the protection of investors because the Commission 
believed that investors would benefit from the conditions governing 
an alternative trading system, in particular Regulation ATS's 
enhanced transparency, market access, system integrity, and audit 
trail provisions. See id.
    \271\ See proposed Rules 301(b)(2)(i) and (vii), respectively.
    \272\ See 17 CFR 242.301(b)(2)(i) and (vii), respectively.
---------------------------------------------------------------------------

    The Commission requests comment generally on all aspects of 
proposed Rule 304(a).
2. Rule 301(b)(2) and Form ATS; ATSs That Trade in Non-NMS Stocks
    The Commission is proposing Rule 301(b)(2)(viii) to provide that an 
NMS Stock ATS shall file the reports and amendments required by 
proposed Rule 304 and would not be subject to the requirements of Rule 
301(b)(2). Existing Rule 301(b)(2) requires an ATS to file with the 
Commission a Form ATS initial operation report, amendments to the Form 
ATS initial operation report, and cessation of operations reports on 
Form ATS, all of which are ``deemed confidential when filed.'' \273\ 
Because the Commission is proposing rules to govern the content and 
manner in which an NMS Stock ATS would be required to disclose 
information to the public and the Commission on proposed Form ATS-N, 
existing Rule 301(b)(2), which applies, and will continue to apply, to 
ATSs that do not effect transactions in NMS stocks would be duplicative 
of the proposed amendments.\274\
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    \273\ See 17 CFR 242.301(b)(2).
    \274\ See supra Section IV.B. (discussing the proposed 
conditions to the exemption in Rule 3a1-1(a) for ATSs that trade NMS 
stocks, as compared to the conditions for ATSs that trade other 
securities or that trade NMS stocks as well as other securities).
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    Proposed Rule 301(b)(2)(viii) would also provide that an ATS that 
effects transactions in both NMS stocks and non-NMS stocks would be 
subject to the requirements of proposed Rule 304 with respect to NMS 
stocks and Rule 301(b)(2) with respect to non-NMS stocks. The 
Commission recognizes that some existing ATSs that would meet the 
definition of NMS Stock ATS also transact in securities other than NMS 
stocks. For these ATSs to be eligible for the exemption under Rule 3a1-
1(a)(2), the Commission preliminarily believes that it is not necessary 
to mandate compliance with the heightened transparency requirements 
under proposed Rule 304 with respect to their non-NMS stock operations. 
Based on Commission experience, these ATSs are designed so that the 
platform on which non-NMS stock order flow interacts and executes 
differs from the platform on which NMS stock order flow interacts and 
executes. Furthermore, as explained above, the Commission preliminarily 
believes that the operational transparency concerns for NMS Stock ATSs 
do not apply equally to the markets for non-NMS stocks.\275\ As such, 
the Commission has tailored proposed Form ATS-N to address the specific 
operational transparency concerns raised by the current functionalities 
of the ATS platforms on which NMS stock order flow interacts and 
executes. Additionally, the Commission preliminarily believes that 
applying proposed Rule 304 to the non-NMS stock operations of ATSs that 
trade both NMS stocks and non-NMS stocks would impose unequal 
regulatory burdens across ATSs that transact in non-NMS stocks. Under 
such a rule, ATSs that trade both NMS stocks and non-NMS stocks would 
be required to meet the heightened standards of proposed Rule 304 to be 
eligible for the exemption under Rule 3a1-1(a)(2) with regard to their 
non-NMS stock operations, whereas ATSs that only trade non-NMS stocks 
would not be subject to the standards under proposed Rule 304.
---------------------------------------------------------------------------

    \275\ See supra Section IV.B.
---------------------------------------------------------------------------

    The Commission also proposes to amend Rule 301(b)(9),\276\ which 
requires an ATS to report transaction volume on Form ATS-R on a 
quarterly basis and within 10 calendar days after it ceases operation. 
The Commission proposes to amend Rule 301(b)(9) to require an ATS that 
trades both NMS stocks and non-NMS stocks to separately report its 
transactions in NMS stocks on one Form ATS-R, and its transactions in 
non-NMS stocks on another Form ATS-R. The information filed on Form 
ATS-R permits the Commission to monitor trading on an ATS.\277\ As 
noted above, the Commission proposes to require each ATS with both NMS 
stock and non-NMS stock operations to file a Form ATS-N for its NMS 
stock operations and a separate Form ATS for its non-NMS stock 
operations. Because the proposed Form ATS-N and Form ATS filings of 
such ATSs would describe separate functionalities--the functionalities 
for the trading of NMS stocks and those for the trading of non-NMS 
stocks, respectively--the Commission preliminarily believes that these 
ATSs should file a separate Form ATS-R to report the trading activity 
for each functionality to avoid confusion and for regulatory 
efficiency. Accordingly, the Commission is proposing to require that 
these ATSs file a Form ATS-R to report transaction volume resulting 
from their NMS stock operations, as disclosed on a Form ATS-N, and a 
separate Form ATS-R to

[[Page 81023]]

report transaction volume resulting from their non-NMS stock 
operations, as disclosed on Form ATS. The Commission notes that Form 
ATS-R would continue to be deemed confidential.
---------------------------------------------------------------------------

    \276\ See 17 CFR 242.301(b)(9).
    \277\ See Regulation ATS Adopting Release, supra note 7, at 
70878.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendments to Rules 
301(b)(2) and 301(b)(9). In particular, the Commission solicits comment 
on the following:
    45. Should the Commission require ATSs that trade both NMS stocks 
and non-NMS stocks to make filings on both proposed Form ATS-N, with 
respect to its NMS stock operations, and Form ATS, with respect to its 
non-NMS stock operations? Why or why not? Please support your 
arguments.
    46. Should the Commission require ATSs that trade both NMS stocks 
and non-NMS stocks to file a Form ATS-R with respect to their NMS stock 
operations and a separate Form ATS-R with respect to their non-NMS 
stock operations? Why or why not? Please support your arguments.
    47. Do you believe that ATSs that trade both NMS stocks and non-NMS 
stocks should be subject to proposed Rule 304, in whole or in part, for 
both their NMS stock operations and non-NMS stock operations? Why or 
why not? Please support your arguments.
    Do you believe that ATSs that trade both NMS stocks and non-NMS 
stocks should be required to disclose their NMS stock and non-NMS stock 
operations solely on proposed Form ATS-N? If so, why, and what 
additional disclosures should be required on proposed Form ATS-N to 
reflect non-NMS stock operations? If not, why not? Please support your 
arguments.
3. Proposed Rule 304(a)(1)(i) and (ii): Filing and Review of Form ATS-N
    Proposed Rule 304(a)(1)(i) would provide that no exemption from the 
definition of ``exchange'' is available to an NMS Stock ATS pursuant to 
Exchange Act Rule 3a1-1(a)(2) unless the NMS Stock ATS files with the 
Commission a Form ATS-N and the Commission declares the Form ATS-N 
effective. The Commission preliminarily believes that an NMS Stock ATS 
that is not operating on the effective date of proposed Rule 304 should 
not be permitted to commence operations until the Commission has had 
the opportunity to assess whether the NMS Stock ATS qualifies for the 
Rule 3a1-1(a)(2) exemption. As discussed above,\278\ the current 
requirements of the Rule 3a1-1(a)(2) exemption mandate that an ATS only 
provide notice of its operation on a Form ATS initial operation report 
20 days prior to commencing operations.\279\ The Commission's review of 
Form ATS-N would help ensure that an NMS Stock ATS's disclosures comply 
with the requirements of proposed Rule 304 and that a consistent level 
of information is made available to market participants in evaluating 
NMS Stock ATSs.\280\
---------------------------------------------------------------------------

    \278\ See supra Section IV.B.
    \279\ 17 CFR 242.301(b)(2).
    \280\ The Commission notes, however, that Form ATS-N is intended 
to provide regulatory and public transparency. As such, its review 
of Form ATS-N will be focused on an evaluation of the completeness 
and accuracy of the disclosure thereon, and compliance with federal 
securities laws. Even if the Commission declares a Form ATS-N 
effective, the Commission would not be precluded from later 
determining that an NMS Stock ATS had violated the federal 
securities laws or the rules and regulations thereunder. See infra 
Section IV.C.8.
---------------------------------------------------------------------------

    Proposed Rule 304(a)(1)(i) is also designed as a transition for 
currently operating ATSs that meet the proposed definition of NMS Stock 
ATS. Proposed Rule 304(a)(1)(i) would require an existing ATS that 
facilitates transactions in NMS stocks and that operates pursuant to a 
previously filed initial operation report on Form ATS as of the 
effective date of proposed Rule 304 (i.e., a ``legacy NMS Stock ATS'') 
to file a Form ATS-N with the Commission no later than 120 calendar 
days after the effective date of proposed Rule 304. In other words, the 
effectiveness of an existing Form ATS would not suffice for a legacy 
NMS Stock ATS to retain its exemption from the definition of 
``exchange'' with respect to its Rule 3b-16 activity in NMS stocks 
beyond the transition period following the effectiveness of proposed 
Rule 304. The Commission is also proposing in Rule 304(a)(1)(i) that a 
legacy NMS Stock ATS may continue to operate pursuant to a previously 
filed initial operation report on Form ATS pending the Commission's 
review of the filed Form ATS-N.\281\ This provision would allow the NMS 
Stock ATS to continue its current operations without disruptions to the 
NMS Stock ATS or its current subscribers and provide the NMS Stock ATS 
with sufficient time to make an orderly transition from compliance 
under the current Regulation ATS requirements to compliance with the 
proposed requirements of Rule 304. The Commission notes that during the 
Commission's review of the filed Form ATS-N, the NMS Stock ATS would 
continue to operate pursuant to its existing Form ATS initial operation 
report and would continue to be required to file amendments on Form ATS 
to provide notice of changes to the operations of its system.\282\
---------------------------------------------------------------------------

    \281\ The NMS Stock ATS would be required to continue to comply 
with Regulation ATS.
    \282\ 17 CFR 242.301(b)(2)(ii) through (iv).
---------------------------------------------------------------------------

    The Commission considered the alternative of allowing an existing 
ATS that engages in Rule 3b-16 activity in NMS stocks to retain its 
exemption from the definition of ``exchange'' by virtue of its existing 
Form ATS, and to require only a new NMS Stock ATS to file Form ATS-N. 
However, the Commission preliminarily believes that this alternative 
would not be appropriate as it would create a significant competitive 
disparity between a ``new'' and ``legacy'' NMS Stock ATS, with the 
latter benefitting from substantially lighter disclosure requirements. 
More importantly, it would perpetuate the problem of limited 
information being available to market participants. Nevertheless, the 
Commission preliminarily believes that it would be appropriate to 
provide existing ATSs that engage in Rule 3b-16 activity with regard to 
NMS stocks an adjustment period after the effective date of proposed 
Rule 304 to file a Form ATS-N. The Commission preliminarily believes 
that 120 calendar days is sufficient time for a legacy NMS Stock ATS to 
respond to the disclosure requirements on the new Form ATS-N because an 
ATS that is currently operating should be knowledgeable about the 
operations of its system and the activities of its broker-dealer 
operator and its affiliates.
    Proposed Rule 304(a)(1)(ii)(A) would provide that the Commission 
declare a Form ATS-N filed by an NMS Stock ATS operating as of the 
effective date of proposed Rule 304 effective or ineffective no later 
than 120 calendar days from filing with the Commission. Similarly, 
Proposed Rule 304(a)(1)(ii)(B) would provide that the Commission 
declare a Form ATS-N filed by an NMS Stock ATS that was not operating 
as of the effective date of proposed Rule 304 effective or ineffective 
no later than 120 calendar days from filing with the Commission. The 
disclosures required by proposed Form ATS-N are more comprehensive than 
those required on current Form ATS, particularly in terms of volume, 
complexity, and detail. Based on its experience over the past seventeen 
years of receiving and reviewing notices on Form ATS, the Commission 
preliminarily believes that it would receive a large amount of 
information provided in Form ATS-N filings. The Commission 
preliminarily believes that 120 calendar days would provide the 
Commission adequate time to carry out its oversight functions with 
respect to its review of Forms ATS-N

[[Page 81024]]

filed by legacy and new NMS Stock ATSs, including its responsibilities 
to protect investors and maintain fair, orderly, and efficient 
markets.\283\
---------------------------------------------------------------------------

    \283\ As discussed above, a legacy NMS Stock ATS would be able 
continue to operate pursuant to a previously filed initial operation 
report on Form ATS pending the Commission's review of the filed Form 
ATS-N.
---------------------------------------------------------------------------

    Proposed Rule 304(a)(1)(ii)(A) would further provide a process for 
the Commission to extend the review period for Forms ATS-N filed by NMS 
Stock ATSs operating as of the effective date of proposed Rule 304: (1) 
An additional 120 calendar days, if the Form ATS-N is unusually lengthy 
or raises novel or complex issues that require additional time for 
review, in which case the Commission will notify the NMS Stock ATS in 
writing within the initial 120-day review period and will briefly 
describe the reason for the determination that additional time for 
review is required; or (2) any extended review period to which the NMS 
Stock ATS agrees in writing. Proposed Rule 304(a)(1)(ii)(B) would 
include a similar provision for NMS Stock ATSs not operating as of the 
effective date of proposed Rule 304, except that the Commission could 
extend its review period up to 90 calendar days. The proposed 
disclosure requirements require more detailed disclosures regarding the 
operations of an NMS Stock ATS than do the current requirements; 
thereby increasing the amount of information for the Commission to 
review. The Commission preliminarily believes that the additional time 
provided by the proposed rule is appropriate because it would allow 
Commission and its staff to conduct a thorough review of certain 
lengthy, novel, or complex Form ATS-N filings and provide sufficient 
opportunity to discuss the filing with the NMS Stock ATS if necessary.
Request for Comment
    48. Do you believe the Commission should adopt a rule in which it 
is required to declare a Form ATS-N filed by an NMS Stock ATS effective 
or ineffective within 120 calendar days of filing? Do you believe this 
is an appropriate time frame in light of the amount and nature of 
information to be submitted on Form ATS-N? Why or why not? Does any 
experience with Exchange Act Rule 19b-4 filings by self-regulatory 
organizations, either in draft or in formal submission, inform the 
appropriate time frame?
    49. Should the Commission adopt a process to further extend the 
period of review under certain circumstances? If so, what circumstances 
and why? Please support your arguments.
    50. If the Commission does not declare a Form ATS-N filing 
effective or ineffective within 120 calendar days from filing with the 
Commission, or any extension of the 120-day period pursuant to proposed 
Rule 304(a)(1)(ii), do you believe the Form ATS-N should be 
automatically deemed effective? Why or why not? Please support your 
arguments.
    51. If the Commission does not declare a Form ATS-N filing 
effective or ineffective within 120 calendar days from filing with the 
Commission, or any extension of the 120-day period pursuant to proposed 
Rule 304(a)(1)(ii), do you believe the Form ATS-N should be 
automatically deemed ineffective? Why or why not? Please support your 
arguments.
4. Proposed Rule 304(a)(1)(iii): Declarations of Effectiveness or 
Ineffectiveness of Form ATS-N
    Proposed Rule 304(a)(1)(iii) would provide that the Commission will 
declare effective a Form ATS-N if the NMS Stock ATS qualifies for the 
Rule 3a1-1(a)(2) exemption. Proposed Rule 304(a)(1)(iii) would also 
provide that the Commission will declare ineffective a Form ATS-N if it 
finds, after notice and opportunity for hearing, that such action is 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors.\284\
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    \284\ A submitted Form ATS-N that contains technical 
deficiencies, such as missing pages or one in which the entity does 
not respond to all questions, including all sub-questions, would not 
be complete and would be returned to the NMS Stock ATS. See also 17 
CFR 240.0-3. Return of a Form ATS-N would not prejudice any decision 
by the Commission regarding effectiveness or ineffectiveness should 
the NMS Stock ATS resubmit a Form ATS-N. The Commission notes an NMS 
Stock ATS also can choose to withdraw a filed Form ATS-N.
---------------------------------------------------------------------------

    Under the proposal, the Commission would use Form ATS-N to evaluate 
whether an entity qualifies for an exemption under Rule 3a1-
1(a)(2).\285\ For the Commission to declare a Form ATS-N effective, it 
would evaluate, among other things, whether the entity satisfies the 
definition of ATS,\286\ and more specifically, the definition of NMS 
Stock ATS.\287\ The Commission preliminarily believes that whether an 
entity meets the definition of ``NMS Stock ATS'' should be a threshold 
requirement for the Commission to declare a Form ATS-N effective, and 
therefore for the ATS to qualify for the Rule 3a1-1(a)(2) exemption. 
Proper classification of an entity would clearly indicate to market 
participants, as well as the Commission, the functions that entity 
performs and the regulatory framework and attendant obligations that 
attach to that entity.\288\ Thus, if the proposed category of NMS Stock 
ATS is adopted, the Commission preliminarily believes it needs to 
mitigate concerns that market participants may be confused or misled 
about whether an entity in fact meets the definition of an NMS Stock 
ATS. If an entity does not meet the definition, market participants may 
hold false expectations about how their orders may interact or be 
matched with other orders or they may not fully understand whether the 
entity with which they are doing business is required to comply with 
Regulation ATS. For these reasons, the Commission preliminarily 
believes that it would be necessary or appropriate in the public 
interest, and consistent with the protection of investors, to declare 
ineffective a Form ATS-N if it finds, after notice and opportunity for 
hearing, that the Form ATS-N was filed by an entity that does not meet 
the functional test under Exchange Act Rule 3b-16, does not perform 
functions commonly performed by a stock exchange, or

[[Page 81025]]

exercises SRO powers.\289\ Similarly, the Commission preliminarily 
believes that it would be necessary or appropriate in the public 
interest, and consistent with the protection of investors, to declare 
ineffective a Form ATS-N if it finds, after notice and opportunity for 
hearing, that the Form ATS-N was filed by an entity that does not meet 
the proposed definition of ``NMS Stock ATS.''
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    \285\ An NMS Stock ATS would also be required to comply with 
other requirements of Rules 300 through 303 of Regulation ATS 
(except Rule 301(b)(2)) and proposed Rule 304.
    \286\ Regulation ATS defines an ATS as any organization, 
association, person, group of persons, or system that constitutes 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 Exchange Act Rule 3b-16, and does not set 
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 discipline subscribers under 
the Exchange Act other than by exclusion from trading. See 17 CFR 
242.300(a).
    Under Exchange Act Rule 3b-16, an organization, association, or 
group of persons shall be considered to constitute, maintain, or 
provide ``a marketplace 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. See supra note 48 and accompanying text. See also supra 
Section IV.A (discussing the proposed definition of ``NMS Stock 
ATS'').
    \287\ See proposed Rule 300(k). See also supra Section IV.A 
(discussing the proposed definition of NMS Stock ATS).
    \288\ For example, an ATS that is not an NMS Stock ATS would be 
subject to different conditions to be eligible for the Rule 3a1-
1(a)(2) exemption. Similarly, depending on the facts and 
circumstances, an entity that is not an ATS may be subject to 
requirements as a broker-dealer, but not the conditions of 
Regulation ATS, or may be required to register as an exchange.
    \289\ See supra Section IV.A. (discussing the definition of NMS 
Stock ATS and the underlying definition of ATS).
     The entity would not fall within the definition of an 
``exchange'' under Section 3(a)(1) of the Exchange Act and the 
exemption provided in Exchange Act Rule 3a1-1 would not be 
applicable.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that it would be 
necessary or appropriate in the public interest, and consistent with 
the protection of investors, to declare ineffective a Form ATS-N if it 
finds, after notice and opportunity for hearing, that one or more 
disclosures on Form ATS-N are materially deficient with respect to 
their accuracy, currency, or completeness. The requirements of proposed 
Form ATS-N are set forth in proposed Rule 304(c)(1), which provides 
that an NMS Stock ATS must respond to each item on Form ATS-N, as 
applicable, in detail and disclose information that is accurate, 
current, and complete. The Commission preliminarily believes that 
market participants would use information disclosed on Form ATS-N to 
evaluate whether a particular NMS Stock ATS would be a desirable venue 
to which to route their orders. In addition, the Commission intends to 
use the information disclosed on the Form ATS-N to exercise oversight 
over and monitor developments of NMS Stock ATSs. Given these potential 
uses, the Commission preliminarily believes that it is important that 
Form ATS-N contain detailed disclosures that are accurate, current, and 
complete.\290\
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    \290\ Proposed Form ATS-N is designed to provide market 
participants and the Commission with, among other things, current 
information about the operations of the NMS Stock ATS and the 
activities of the broker-dealer operator and its affiliates. 
Accordingly, an NMS Stock ATS would be required to provide 
information on proposed Form ATS-N that reflects the operations of 
the NMS Stock ATS at the time its Form ATS-N is declared effective 
by the Commission. Any changes in the operations of the NMS Stock 
ATS must be disclosed by the NMS Stock ATS in a Form ATS-N 
Amendment.
---------------------------------------------------------------------------

    The following non-exhaustive examples are provided to illustrate 
various applications of proposed Rule 304(a)(1)(iii) that could cause 
the Commission to declare a Form ATS-N ineffective because it contains 
one or more disclosures that appear to be materially deficient.\291\ 
For instance, if an NMS Stock ATS discloses an order type on Form ATS-N 
but does not describe the key attributes of the order type, such as 
time-in-force limitations that can be placed on the ability to execute 
the order, the treatment of unfilled portions of orders, or conditions 
for cancelling orders in whole or in part, the Form ATS-N would not be 
sufficiently detailed. Likewise, if an NMS Stock ATS generally 
describes some of its priority rules, but fails to describe conditions 
or exceptions to its priority rules, or fails to describe any priority 
overlays,\292\ the Form ATS-N would lack sufficient detail. If a Form 
ATS-N states that the NMS Stock ATS has only one class of subscribers 
but the Commission or its staff learns through discussions (during the 
review period) with the NMS Stock ATS or otherwise that the NMS Stock 
ATS in fact has several classes of subscribers, or if the Form ATS-N 
states that two classes of subscribers are charged the same trading 
fees but the Commission or its staff learns through discussions with 
the NMS Stock ATS or otherwise that in fact one class receives more 
favorable fees than the other, the Form ATS-N would not be accurate. If 
a Form ATS-N includes inconsistent information, such as a statement in 
one part of the form that the entity uses private feeds to calculate 
the NBBO, but in another part of the form it indicates that it uses the 
Securities Information Processor (``SIP''), the Form ATS-N would not be 
accurate.
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    \291\ The Commission notes that these are some, but not 
necessarily all, of the types of circumstances that could result in 
the Commission declaring a Form ATS-N ineffective under the proposed 
rule.
    \292\ In other words, if the NMS Stock ATS fails to describe 
which order would receive priority when two or more orders are 
otherwise on par, such as whether customer orders receive priority 
in a price priority system if a customer and non-customer order are 
at the same price, the disclosure would not be sufficient.
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    The Commission preliminarily believes that it would be necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to declare ineffective a Form ATS-N if it finds, after 
notice and opportunity for hearing, that one or more disclosures 
reveals non-compliance with federal securities laws, or the rules or 
regulations thereunder, including Regulation ATS. The Commission notes 
that the responsibility for accurate, current, and complete disclosures 
on Form ATS-N lies with the NMS Stock ATS.\293\ The Commission's review 
of Form ATS-N would focus on an evaluation of the completeness and 
accuracy of the disclosures, and compliance with federal securities 
laws, including Regulation ATS. The Commission's evaluation regarding 
compliance with federal securities laws would involve a ``red-flag'' 
review of the Form ATS-N disclosures for apparent non-compliance with 
federal securities laws, or other rules or regulations thereunder, 
including Regulation ATS, and would focus on the disclosures made on 
the Form ATS-N. For example, as a condition to the Rule 3a1-1(a)(2) 
exemption, Rule 301(b)(1) of Regulation ATS requires that an ATS 
register as a broker-dealer under Section 15 of the Exchange Act.\294\ 
Section 15(b)(8) of the Exchange Act\295\ prohibits a registered broker 
or dealer from effecting a transaction unless the broker or dealer is a 
member of a securities association registered pursuant to Section 15A 
of the Exchange Act \296\ or effects transactions solely on a national 
securities exchange of which it is a member. Therefore, to comply with 
Regulation ATS, and thus qualify for the Rule 3a1-1(a)(2) exemption, an 
ATS must become a member of an SRO. If an entity were to file a Form 
ATS-N before registering as a broker-dealer under Section 15 of the 
Exchange Act, the entity would not be in compliance with Rule 301(b)(1) 
of Regulation ATS.\297\ Moreover, if the entity were to file a Form 
ATS-N before becoming a member of an SRO, the entity would not be in 
compliance with Rule 301(b)(1) of Regulation ATS because Section 
15(b)(1) provides that a Commission order granting registration is not 
effective until the broker-dealer has become a member of a national 
securities association registered pursuant to Section 15A of the 
Exchange Act,\298\ and the Commission's order granting broker-dealer 
registration would not be effective.\299\ The Commission preliminarily 
believes that it would be necessary or appropriate in the public 
interest, and consistent with the protection of investors, to declare 
ineffective a Form ATS-N if it finds, after notice and opportunity for 
hearing, that a Form ATS-N reveals non-compliance with Regulation ATS 
because such non-compliance would be inconsistent with proposed Rule 
304(a), which requires that an NMS Stock ATS

[[Page 81026]]

comply with Rules 300 through 304 (except Rule 301(b)(2)) as a 
condition to the exemption from the definition of exchange pursuant to 
Rule 3a1-1(a)(2).\300\ As another example, if a Form ATS-N reveals non-
compliance with Rule 612 of Regulation NMS, known as the ``Sub-Penny 
Rule,'' which prohibits market participants, including ATSs, from 
displaying, ranking, or accepting orders, quotations, or indications of 
interest in NMS stock priced in an increment smaller than $0.01,\301\ 
the Form ATS-N would not be consistent with the proposed Rule because 
the NMS Stock ATS would operate in a manner that would violate the 
federal securities laws.
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    \293\ See infra Section IV.E. and accompanying discussion. 
Proposed Rule 304(c)(1) would require NMS Stock ATSs to respond to 
each item on Form ATS-N, as applicable, in detail and disclose 
information that is accurate, current, and complete.
    \294\ 17 CFR 242.301(b)(1).
    \295\ 15 U.S.C. 78o(b)(8).
    \296\ 15 U.S.C. 78o-3.
    \297\ See 17 CFR 301(b)(1). Rule 301(b)(1) requires an ATS to 
register as a broker-dealer under Section 15 of the Exchange Act.
    \298\ See 15 U.S.C. 78o(b)(1).
    \299\ See 17 CFR 242.301(b)(1).
    \300\ The Commission notes that determining whether an NMS Stock 
ATS qualifies for the exemption from the definition of ``exchange'' 
would be based on information as it appears in Form ATS-N. If the 
Commission were to learn of different information, that 
determination may change.
    \301\ Specifically, Rule 612(a) of Regulation NMS provides that 
``no national securities exchange, national securities association, 
alternative trading system, vendor, or broker or dealer shall 
display, rank, or accept from any person a bid or offer, an order, 
or an indication of interest in any NMS stock priced in an increment 
smaller than $0.01 if that bid or offer, order, or indication of 
interest is priced equal to or greater than $1.00 per share.'' See 
17 CFR 242.612(a).
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    During its review, the Commission and its staff may provide 
comments to the entity, and may request that the entity supplement 
information in the Form ATS-N or revise its disclosures on Form ATS-
N.\302\ An order declaring a Form ATS-N effective would not constitute 
a finding that the NMS Stock ATS's operations are consistent with the 
Exchange Act and the rules and regulations thereunder. Rather, the 
declaration of effectiveness would only address the issue of whether 
the NMS Stock ATS has complied with the requirements of Form ATS-N and 
would focus on the disclosures made on the Form ATS-N. The Commission 
would not be precluded from later determining that an NMS Stock ATS had 
violated the federal securities laws or the rules and regulations 
thereunder.
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    \302\ The Commission notes, however, that Form ATS-N is intended 
to provide regulatory and public transparency. As such, its review 
of Form ATS-N will be focused on an evaluation of the completeness 
and accuracy of the disclosure thereon, and compliance with federal 
securities laws.
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Request for Comment
    52. Should Form ATS-N be deemed immediately effective without 
Commission action? Why or why not? Please support your arguments.
    53. Should Form ATS-N be considered ineffective on filing with the 
Commission until the Commission affirmatively declares the Form ATS-N 
ineffective? Why or why not? Please support your arguments.
    54. Should the process for making a Form ATS-N effective for a 
legacy NMS Stock ATS be different from the process for making a Form 
ATS-N effective for an NMS Stock ATS that files a Form ATS-N after the 
effective date of the proposed rule? Why or why not? Please support 
your arguments. If so, how should the processes for the two categories 
of NMS Stock ATSs differ?
    55. Do you believe that the proposed 120 calendar days after the 
effective date of proposed Rule 304 is a reasonable amount of time for 
legacy NMS Stock ATSs to complete and file a Form ATS-N? If so, why? If 
not, why not, and what amount of time would be reasonable? Please 
support your arguments.
    56. Do you believe that new NMS Stock ATSs would be at a 
competitive disadvantage if existing NMS Stock ATSs were not required 
to file a Form ATS-N? Why or why not? Please support your arguments.
    57. Do you believe that the proposed 120 calendar day period from 
filing with the Commission is a reasonable amount of time for the 
Commission to declare a Form ATS-N filed by an NMS Stock ATS that was 
not operating as of the effective date of proposed Rule 304 effective 
or ineffective? Do you believe the review period would place an undue 
burden on the NMS Stock ATS that filed the Form ATS-N? If yes, what 
amount of time would be reasonable? Please support your arguments.
    58. Should the Commission adopt the proposal to allow a legacy NMS 
Stock ATS to continue operations pursuant to an existing filed initial 
operation report on Form ATS pending the Commission's review of its 
Form ATS-N? Why or why not? Please support your arguments.
    59. Do you believe that if a legacy NMS Stock ATS is allowed to 
continue operations during the Commission's review of its Form ATS-N 
the Commission should make such NMS Stock ATS's Form ATS-N publicly 
available upon filing? Why or why not? Please support your arguments.
    60. Should the Commission permit existing NMS Stock ATSs to be 
exempt from the definition of ``exchange'' by virtue of the NMS Stock 
ATS's current Form ATS on file with the Commission and require only new 
NMS Stock ATSs to file Form ATS-N? Why or why not? Would this raise 
competitive concerns with respect to disparate regulatory treatment of 
``new'' and ``legacy'' NMS Stock ATSs? Why or why not? Please support 
your arguments.
    61. Do you believe that the proposed 90 calendar days for the 
Commission to extend the Form ATS-N review period for new NMS Stock 
ATSs where the Form ATS-N is unusually lengthy or raises novel or 
complex issues is reasonable? Do you believe it would place an undue 
burden on the NMS Stock ATS? If so, why, and what amount of time would 
be reasonable? Do you believe that the proposed 90 calendar day 
extension period disproportionately affects new NMS Stock ATSs? Please 
support your arguments.
    62. Should the Commission adopt the proposal to declare ineffective 
a Form ATS-N if it finds, after notice and opportunity for hearing, 
that such action is necessary or appropriate in the public interest, 
and is consistent with the protection of investors? Please support your 
arguments.
    63. Do you believe that the Commission's examples of reasons that 
the Commission might declare a proposed Form ATS-N ineffective are 
appropriate? If yes, why? If not, why not? Please support your 
arguments.
    64. Do you believe that the Commission should consider any other 
factors in determining whether a Form ATS-N should be declared 
effective or ineffective? If so, what are they and why? If not, why 
not? Please support your arguments.
    65. Should the Commission require public notice and comment before 
declaring a Form ATS-N effective or ineffective? Why or why not? Please 
support your arguments.
5. Proposed Rule 304(a)(1)(iv): Orders Regarding Form ATS-N 
Effectiveness
    Proposed Rule 304(a)(1)(iv) would provide that the Commission will 
issue an order to declare a Form ATS-N effective or ineffective. 
Proposed Rule 304(a)(1)(iv) would also provide that upon the 
effectiveness of the Form ATS-N, the NMS Stock ATS may operate pursuant 
to the conditions in proposed Rule 304. Proposed Rule 304(a)(1)(iv) 
would also provide that if the Commission declares a Form ATS-N 
ineffective, the NMS Stock ATS shall be prohibited from operating as an 
NMS Stock ATS. Proposed Rule 304(a)(1)(iv) would provide that a Form 
ATS-N declared ineffective would not prevent the NMS Stock ATS from 
subsequently filing a new Form ATS-N.
    Proposed Rule 304(a)(1)(iv) is designed to provide notice to the 
public that the NMS Stock ATS that filed a Form ATS-N qualifies for the 
exemption provided under Exchange Act Rule 3a1-1(a)(2) and may commence 
operations, or if the NMS

[[Page 81027]]

Stock ATS was operating pursuant to a previously filed Form ATS, may 
continue to operate as an NMS Stock ATS. For an NMS Stock ATS operating 
before the effective date of proposed Rule 304 pursuant to a current 
Form ATS, the Form ATS for that NMS Stock ATS would no longer have any 
legal effect with respect to the regulatory status of the NMS Stock ATS 
upon the Commission declaring its Form ATS-N effective. As a result, 
the effective Form ATS-N would supersede and replace the NMS Stock 
ATS's previously filed Form ATS; and the NMS Stock ATS would no longer 
be subject to Rule 301(b)(2) of Regulation ATS and would not be 
required to file a Form ATS cessation of operation report because the 
NMS Stock ATS would continue operations under the effective Form ATS-N. 
Declaring a Form ATS-N ineffective would provide the public with notice 
that an entity that filed a Form ATS-N does not qualify for the 
exemption under Exchange Act Rule 3a1-1(a)(2) and would be precluded 
from operating as an NMS Stock ATS.
    Under Proposed Rule 304(a)(1)(iv), an entity that had filed a Form 
ATS-N that had been declared ineffective by the Commission would be 
able to subsequently file a new Form ATS-N. This would allow an entity 
an opportunity to attempt to address any disclosure deficiencies or 
compliance issues that caused the first Form ATS-N to be declared 
ineffective.
Request for Comment
    66. Do you believe that a Commission order declaring a Form ATS-N 
ineffective would have an unduly prejudicial effect on an entity when 
it refiles Form ATS-N, even where the Commission declares effective the 
refiled Form ATS-N? Why or why not? Please support your arguments.
6. Proposed Rule 304(a)(2): Form ATS-N Amendments
    The Commission is proposing Rule 304(a)(2) to provide the 
requirements for filing a Form ATS-N Amendment, which would be a public 
document that would provide information about the operations of the NMS 
Stock ATS and the activities of its broker-dealer operator and its 
affiliates. The information required to be filed on proposed Form ATS-N 
is designed to enable market participants to make more informed 
decisions about routing their orders to the NMS Stock ATS. The 
Commission's proposal to require such public disclosure is designed, in 
part, to bring operational transparency of NMS Stock ATSs more in line 
with the operational transparency of national securities 
exchanges.\303\ Proposed Form ATS-N is also designed to provide 
information to the Commission that would allow it to monitor 
developments among NMS Stock ATSs and carry out its oversight functions 
of protecting investors and the public interest. Given these intended 
uses, the Commission believes that it is important for an NMS Stock ATS 
to maintain an accurate, current, and complete.
---------------------------------------------------------------------------

    \303\ See, e.g., supra notes 158-162 and accompanying text 
(discussing generally differences in disclosure requirements for 
national securities exchanges and ATSs). The Commission also notes 
that Rule 19b-4(m)(1) of the Exchange Act (17 CFR 240.19b-4(m)(1)), 
requires each SRO to post and maintain a current and complete 
version of its rules on its Web site. This requirement was designed 
to assure that SRO members and other interested persons have ready 
access to an accurate, up-to-date version of SRO rules. See 
Securities Exchange Act Release No. 50486 (October 5, 2004), 69 FR 
60287 (October 8, 2004) (adopting amendments to Rule 19b-4 under the 
Act).
---------------------------------------------------------------------------

    The Commission is proposing Rule 304(a)(2)(i) to require an NMS 
Stock ATS to amend an effective Form ATS-N in accordance with the 
instructions therein: (A) At least 30 calendar days prior to the date 
of implementation of a material change to the operations of the NMS 
Stock ATS or to the activities of the broker-dealer operator or its 
affiliates that are subject to disclosure on Form ATS-N; (B) within 30 
calendar days after the end of each calendar quarter to correct any 
other information that has become inaccurate for any reason and has not 
been previously reported to the Commission as a Form ATS-N Amendment; 
or (C) promptly, to correct information in any previous disclosure on 
Form ATS-N, after discovery that any information filed under Rule 
304(a)(1)(i) or (a)(2)(i)(A) or (B) was inaccurate or incomplete when 
filed.\304\
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    \304\ The Commission notes that ATSs currently are required to 
file amendments to the disclosures describing their operations on 
Form ATS (see supra Section II.B describing the current requirements 
applicable to ATSs), and that national securities exchanges, as 
SROs, are required to file proposed rule changes with the Commission 
before implementing such changes, even if such changes are non-
controversial (see generally supra note 161 and accompanying text).
---------------------------------------------------------------------------

    Proposed Rule 304(a)(2)(ii) would provide that the Commission will, 
by order, if it finds that such action is necessary or appropriate in 
the public interest, and is consistent with the protection of 
investors, declare ineffective any Form ATS-N Amendment filed pursuant 
to Rule 304(a)(2)(i)(A) through (C) no later than 30 calendar days from 
filing with the Commission. If the Commission declares a Form ATS-N 
Amendment ineffective, the NMS Stock ATS shall be prohibited from 
operating pursuant to the ineffective Form ATS-N Amendment. The NMS 
Stock ATS could, however, continue to operate pursuant to a Form ATS-N 
that was previously declared effective. A Form ATS-N Amendment declared 
ineffective would not prevent the NMS Stock ATS from subsequently 
filing a new Form ATS-N Amendment that resolves the disclosure 
deficiency that resulted in the declaration of ineffectiveness.
a. Proposed Rule 304(a)(2)(i)(A): Material Amendments
    Proposed Rule 304(a)(2)(i)(A) would, in part, require an NMS Stock 
ATS to amend an effective Form ATS-N in accordance with the 
instructions therein at least 30 calendar days prior to the date of 
implementation of a material change to the operations of the NMS Stock 
ATS or to the activities of the broker-dealer operator or its 
affiliates that are subject to disclosure on Form ATS-N. Proposed Rule 
304(a)(2)(i)(A) is designed to provide advance notice to the Commission 
and market participants of a material change to the operations of the 
NMS Stock ATS and the disclosures regarding the activities of the 
broker-dealer operator or its affiliates. The Commission notes that 
under current Rule 301(b)(2)(ii) of Regulation ATS, ATSs are required 
to file an amendment on Form ATS at least 20 calendar days prior to 
implementing a material change to the operation of the ATS.\305\ The 
Commission is proposing to apply a longer time period of 30 days in 
proposed Rule 304(a)(2)(i)(A) due to the additional detail and 
information that would be provided in response to the solicitations on 
Form ATS-N as compared to Form ATS. As stated in the Regulation ATS 
Adopting Release, the Commission believes that requiring an ATS to 
provide the Commission advance notice of certain changes to its 
operation is a reasonable means for the Commission to carry out its 
market oversight and investor protection functions.\306\ The Commission 
preliminarily believes that the 30 calendar day advance notice period 
before material changes are implemented would give the Commission the 
opportunity to make inquiries to clarify any questions that might arise 
or to take appropriate action, if appropriate, regarding problems that

[[Page 81028]]

may impact market participants, including investors, before the NMS 
Stock ATS implemented the changes. Because material changes would be 
publicly disclosed upon filing, the 30 calendar day advance notice 
would also allow market participants to evaluate the changes before 
implementation and assess the NMS Stock ATS as a continued, or 
potential, trading venue.\307\
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    \305\ See 17 CFR 242.301(b)(2)(ii).
    \306\ See Regulation ATS Adopting Release, supra note 7, at 
70864. The Commission also stated that ``[i]f a system were only 
required to provide notice after it commenced operations, the 
Commission would have no notice of potential problems that might 
impact investors before the system begins to operate.'' Id.
    \307\ See infra Section IV.D (explaining proposed public 
disclosure requirements for Form ATS-N filings under proposed Rule 
304(b)(2)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that a change to the 
operations of an NMS Stock ATS, or the disclosures regarding the 
activities of the broker-dealer operator and its affiliates, would be 
material if there is a substantial likelihood that a reasonable market 
participant would consider the change important when evaluating the NMS 
Stock ATS as a potential trading venue. When the Commission adopted 
Regulation ATS in 1998, it noted that ATSs ``implicitly make 
materiality decisions in determining when to notify their subscribers 
of changes.'' \308\ The Commission is proposing to modify the 
conditions to the exemption to the definition of ``exchange'' under 
Rule 3a1-1(a)(2) for NMS Stock ATSs, which includes, among other 
things, the increased disclosure of information required on Form ATS-N. 
Because proposed Form ATS-N would be a public document, the Commission 
preliminarily believes that the use of this materiality standard 
discussed below would be appropriate as it is similar to materiality 
standards applied in the context of securities disclosures made 
pursuant to other Commission rules.\309\
---------------------------------------------------------------------------

    \308\ See id. at 70864.
    \309\ See, e.g., Securities Exchange Act Release No. 43154 
(August 15, 2000), 65 FR 51716, 51721 (August 24, 2000) (Selective 
Disclosure and Insider Trading) (stating that to satisfy the 
materiality requirement, there must be a substantial likelihood that 
a fact would be viewed by the reasonable investor as having 
significantly altered the total mix of information made available); 
see also Regulation C under the Securities Act of 1933, 17 CFR 
230.405 (``The term material, when used to qualify a requirement for 
the furnishing of information as to any subject, limits the 
information required to those matters to which there is a 
substantial likelihood that a reasonable investor would attach 
importance in determining whether to purchase the security 
registered.'').
---------------------------------------------------------------------------

    To determine whether a change is material, and thus subject to the 
30-day advance notice requirement, an NMS Stock ATS would need to 
consider all the relevant facts and circumstances, including the reason 
for the change and how it might impact the NMS Stock ATS and its 
subscribers, as well as market participants that may be evaluating the 
NMS Stock ATS as a potential trading venue. Scenarios that are 
particularly likely to implicate a material change are (1) a broker-
dealer operator or its affiliates beginning to trade on the NMS Stock 
ATS; (2) a change to the broker-dealer operator's policies and 
procedures governing the written safeguards and written procedures to 
protect the confidential trading information of subscribers pursuant to 
Rule 301(b)(10)(i) of Regulation ATS; (3) a change to the types of 
participants on the NMS Stock ATS; (4) the introduction or removal of a 
new order type on the NMS Stock ATS; (5) a change to the order 
interaction and priority procedures; (6) a change to the segmentation 
of orders and participants; (7) a change to the manner in which the NMS 
Stock ATS displays orders or quotes; and (8) a change of a service 
provider to the operations of the NMS Stock ATS that has access to 
subscriber confidential subscriber trading information. This list, 
however, is not intended to be exhaustive, and the Commission does not 
mean to imply that other changes to the operations of the NMS Stock ATS 
or to the activities of the broker-dealer operator or its affiliates 
could not constitute a material change. Rather an NMS Stock ATS should 
be expected to consider the facts and circumstances of every change to 
determine whether advance notice is required.
Request for Comment
    67. Do you believe that the Commission's proposal to require an NMS 
Stock ATS to file a Form ATS-N Amendment at least 30 calendar days 
before implementing a material change is reasonable? Why or why not? 
Please support your arguments. Do you believe that the advance notice 
period for material change on Form ATS-N should be shorter (e.g., 20 
calendar days, as is the case on current Form ATS) or longer (e.g., 45 
calendar days)? Please support your arguments. Do you believe it would 
place an undue burden on the NMS Stock ATS? If so, why, and how much 
advance notice, if any, would be reasonable? Please support your 
arguments.
    68. Are the enumerated scenarios each particularly likely to 
constitute a material change, such that the Commission and the public 
should be provided with 30 calendar days advance notice pursuant to 
proposed Rule 304(a)(2)(i)(A)? If yes, why? If not, why not? Are there 
any other scenarios generally likely to constitute a material change? 
If so, why, and what are those scenarios? Please support your 
arguments.
    69. Do you believe that the Commission should propose separate 
tiers of material changes (e.g., based on the significance or number of 
changes) to the operations of the NMS Stock ATS or disclosures on Form 
ATS-N and that a different materiality analysis should be applied 
depending on the tier of change to the operations of the NMS Stock ATS 
or disclosures on Form ATS-N? Why or why not? Please support your 
arguments.
    70. Do you believe that any types of material changes to an NMS 
Stock ATS should be eligible to be implemented immediately upon filing? 
If so, what are such scenarios (regardless of facts and circumstances)? 
Please support your arguments.
    71. Do you believe that certain changes to the operations of the 
NMS Stock ATS or to the activities of the broker-dealer operator or its 
affiliates that would be subject to disclosure on Form ATS-N should 
always be considered material changes? Why or why not? If so, please 
explain in detail those changes to the operations of the NMS Stock ATS 
or to the activities of the broker-dealer operator or its affiliates 
that would be subject to disclosure on Form ATS-N that should always be 
considered material changes.
    72. Do you believe that certain changes to the operations of the 
NMS Stock ATS or to the activities of the broker-dealer operator or its 
affiliates on Form ATS-N, such as order types, should be subject to 
Commission approval? Why or why not? If so, please identify such 
changes and support your argument.
    73. Should the Commission require public notice and comment for 
determinations of ineffectiveness of Form ATS Amendments? Why or why 
not? Please support your arguments.
    74. Do you believe that the Commission should make public on its 
Web site upon filing a Form ATS-N Amendment for a material change, as 
proposed? Why or why not? Please support your arguments. Do you believe 
that there should be a delay in when the Form ATS-N Amendment for a 
material change is made public? Why or why not? Please support your 
arguments.
    75. Do you believe that making an NMS Stock ATS's Form ATS-N 
Amendment public upon filing would affect competition? Why or why not? 
Please support your arguments. If so, how?

[[Page 81029]]

b. Proposed Rule 304(a)(2)(i)(B): Periodic Amendments
    Proposed Rule 304(a)(2)(i)(B) would require an NMS Stock ATS to 
amend an effective Form ATS-N within 30 calendar days after the end of 
each calendar quarter to correct any other information that has become 
inaccurate for any reason and has not been previously reported to the 
Commission as a Form ATS-N Amendment.\310\ The proposed rule would 
enable NMS Stock ATSs to update information from the preceding quarter 
that does not constitute a material change in the NMS Stock ATS's Form 
ATS-N filing.\311\ The Commission preliminarily believes that providing 
a mechanism for NMS Stock ATSs to disclose changes to their operations 
or to update information that does not constitute a material change 
within 30 calendar days after the end of each calendar quarter would 
tailor the reporting burden on NMS Stock ATSs to the degree of 
significance of the change in a manner that does not compromise the 
Commission's oversight of NMS Stock ATSs or its ability to protect 
investors and the public interest. The Commission preliminarily 
believes that allowing NMS Stock ATSs to implement such changes 
immediately would allow Stock ATSs to make periodic changes to their 
operations without delay, while at the same time provide disclosure 
about those changes to market participants and the Commission within an 
appropriate time frame.
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    \310\ The Commission notes that this requirement would be 
substantively identical to the current requirement under Rule 
301(b)(2)(iii) of Regulation ATS. See 17 CFR 242.301(b)(2)(iii).
    \311\ That Form ATS-N Amendment, filed pursuant to proposed Rule 
304(a)(2)(i)(B), would become public upon filing. See infra Section 
IV.D (explaining proposed public disclosure requirements for Form 
ATS-N filings under proposed Rule 304(b)(2)).
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Request for Comment
    76. Should the Commission require NMS Stock ATSs to file a Form 
ATS-N Amendment for periodic changes at the end of each calendar 
quarter? Why or why not? Please support your arguments.
    77. Do you believe that the Commission should require an NMS Stock 
ATS to file a Form ATS-N Amendment before implementing a periodic 
change? Why or why not? If so, what period of time should an NMS Stock 
ATS be required to wait before implementing a periodic change? Please 
explain in detail.
    78. Do you believe that 30 calendar days after the end of each 
calendar quarter is a reasonable amount of time for NMS Stock ATSs to 
correct information that does not constitute a material change? If so, 
why? If not, why not, and what amount of time would be reasonable? 
Please support your arguments. Do you believe there are any processes 
the Commission should consider for correcting information on a Form 
ATS-N that does not constitute a material change? If so, what are such 
processes? Please explain in detail.
    79. Do you believe that certain changes to the operations of the 
NMS Stock ATS or to the activities of the broker-dealer operator or its 
affiliates that would be subject to disclosure on Form ATS-N should 
always be considered periodic changes? Why or why not? If so, please 
explain in detail those changes to the operations of the NMS Stock ATS 
or to the activities of the broker-dealer operator or its affiliates 
that should always be considered periodic changes.
    Do you believe that the Commission should make public on its Web 
site upon filing a Form ATS-N Amendment for a periodic change? Why or 
why not? Please support your arguments. Do you believe that there 
should be a delay in when the Form ATS-N Amendment for a periodic 
change is made public? Why or why not? Please support your arguments.
c. Proposed Rule 304(a)(2)(i)(C): Amendment To Correct Information on 
Previously Filed Form ATS-N
    Proposed Rule 304(a)(2)(i)(C) would require an NMS Stock ATS to 
amend an effective Form ATS-N promptly to correct information in any 
previous disclosure on Form ATS-N after discovery that any information 
filed in a Form ATS-N or Form ATS-N Amendment was inaccurate or 
incomplete when filed.\312\ For example, if an NMS Stock ATS discovers 
that information that it previously disclosed on Form ATS-N was 
incorrect, such as an address or contact information, or that 
information it previously disclosed was incomplete, such as where the 
NMS Stock ATS failed to fully describe the characteristics of an order 
type, it would be required to promptly amend its Form ATS-N. Although 
the Commission recognizes that a change disclosed on a Form ATS-N 
Amendment that is reported pursuant to proposed Rule 304(a)(2)(i)(C) 
would likely be already implemented by the NMS Stock ATS, the 
Commission believes that it would benefit market participants to 
receive accurate and complete information about the NMS Stock ATS so 
they can use the information in deciding where to route their 
orders.\313\
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    \312\ The Commission notes that this requirement would be 
substantively identical to Rule 301(b)(2)(iv) of Regulation ATS that 
an ATS ``promptly file an amendment on Form ATS correcting 
information previously reported on Form ATS after discovery that any 
information filed'' in a Form ATS initial operation report or 
amendment ``was inaccurate when filed.'' See 17 CFR 
242.301(b)(2)(iv).
    \313\ That Form ATS-N Amendment, filed pursuant to proposed Rule 
304(a)(2)(i)(C), would become public upon filing. See infra Section 
IV.D (explaining proposed public disclosure requirements for Form 
ATS-N filings under proposed Rule 304(b)(2)).
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Request for Comment
    80. Do you believe that making amendments ``promptly'' is a 
reasonable requirement for NMS Stock ATSs to correct information that 
was inaccurate or incomplete when filed? If so, why? If not, why not, 
and what amount of time would be reasonable? Please support your 
arguments.
    81. Do you believe there are any other processes the Commission 
should consider for correcting information on Form ATS-N that was 
inaccurate at the time it was filed? If so, what are such processes? 
Please explain in detail.
    82. Do you believe that the Commission's proposal to provide an NMS 
Stock ATS the opportunity to correct information that was inaccurate or 
incomplete when filed creates an unreasonable risk to market 
participants that an NMS Stock ATS might fail to provide accurate, 
current, and complete information on Form ATS-N when filing the form? 
Why or why not? Please support your arguments.
d. Proposed Rule 304(a)(2)(ii): Commission Review of Form ATS-N 
Amendments
    The Commission is proposing Rule 304(a)(2)(ii) to provide that the 
Commission will, by order, if it finds that such action is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors, declare ineffective any Form ATS-N Amendment 
filed pursuant to Rule 304(a)(2)(i)(A) through (C) no later than 30 
calendar days from filing with the Commission.\314\ The Commission 
could, for example, declare ineffective a Form ATS-N Amendment if one 
or more disclosures on the amended Form ATS-N are materially deficient 
with respect to their accuracy, currency, completeness, or fair 
presentation. The Commission is concerned that an NMS Stock ATS whose 
Form ATS-N filing was declared effective could file a Form

[[Page 81030]]

ATS-N Amendment that contains materially deficient disclosures. The 
Commission is also concerned that market participants could use this 
information in connection with their evaluation of an NMS Stock ATS and 
potentially be confused or misinformed about the operations of an NMS 
Stock ATS. The Commission preliminarily believes that a filed Form ATS-
N should contain detailed disclosures that are accurate, current, and 
complete and therefore is proposing a mechanism for it to declare 
amendments ineffective as appropriate.\315\
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    \314\ A filed Form ATS-N Amendment that contains technical 
deficiencies, such as missing pages or one in which the entity does 
not respond to all questions, including all sub-questions, would not 
be complete and would be returned to the NMS Stock ATS. See also 17 
CFR 240.0-3.
    \315\ See proposed Rule 304(c)(1).
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    The Commission could also declare ineffective a Form ATS-N 
Amendment if it finds that such action is necessary or appropriate in 
the public interest, and is consistent with the protection of 
investors, because the amendment describes a change that, under a ``red 
flag'' review, would not comply with the federal securities laws or the 
rules or regulations thereunder, including Regulation ATS. The 
Commission preliminarily believes that it would be hindered in 
protecting investors and maintaining fair and orderly markets if an NMS 
Stock ATS were allowed to implement or continue the use of a service, 
functionality, or procedure that does not comply with the federal 
securities laws or the rules or regulations thereunder, including 
Regulation ATS.
    Under proposed Rule 304(a)(2)(ii), the Commission could declare a 
Form ATS-N Amendment ineffective within 30 calendar days from filing 
with the Commission. During its review of a Form ATS-N Amendment, the 
Commission and its staff may provide comments to the NMS Stock ATS, and 
may request that the NMS Stock ATS supplement information in the Form 
ATS-N Amendment or revise its disclosures on the Form ATS-N Amendment. 
Like the Commission's review of a Form ATS-N initially filed by an 
entity with the Commission,\316\ the Commission notes that its review 
of a Form ATS-N Amendment would focus on the disclosures made on the 
Form ATS-N. The Commission would not be precluded from later 
determining that an NMS Stock ATS had violated the federal securities 
laws or the rules and regulations thereunder. The Commission 
preliminarily believes that the 30 calendar day review period would 
provide the Commission with adequate time to review the Form ATS-N 
Amendment, discuss the changes with the broker-dealer operator as 
explained above and decide whether to declare the Form ATS-N Amendment 
ineffective.
---------------------------------------------------------------------------

    \316\ See supra Section IV.C.
---------------------------------------------------------------------------

    Under proposed Rule 304(a)(2)(ii), if the Commission declares a 
Form ATS-N Amendment ineffective, the NMS Stock ATS would be prohibited 
from operating pursuant to the ineffective Form ATS-N Amendment. As 
discussed above, under proposed Rule 304(a)(2)(i), an NMS Stock ATS 
must amend its Form ATS-N at least 30 days before implementing a 
material change to the operations of the NMS Stock ATS or to the 
activities of the broker-dealer operator or its affiliates that are 
subject to disclosure on Form ATS-N, or within 30 calendar days after 
the end of each calendar quarter to correct any other information that 
has become inaccurate for any reason and has not been previously 
reported to the Commission as a Form ATS-N Amendment. The Commission 
preliminarily believes the proposed rule strikes a proper balance 
between, on the one hand, providing an NMS Stock ATS with the 
flexibility to implement a change to its operations without unnecessary 
delay, and on the other hand, giving the Commission time to adequately 
review Form ATS-N Amendments and carry out its oversight functions and 
responsibilities.\317\
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    \317\ The Commission also preliminarily believes that the 
proposed process that would permit the Commission to declare Form 
ATS-N Amendments ineffective, even if the change disclosed in the 
Form ATS-N Amendments has already been implemented, would be 
consistent with better aligning the Commission's oversight of NMS 
Stock ATSs with its oversight of national securities exchanges. The 
Commission notes, for example, that pursuant to Section 19(b)(3)(C) 
of the Exchange Act, the Commission, at any time within the 60-day 
period beginning on the date of filing of a proposed rule change 
filed by a national securities exchange, ``summarily may temporarily 
suspend the change in the rules of the [SRO] made thereby, if it 
appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, 
or otherwise in furtherance of the purposes of [the Act].'' 15 
U.S.C. 78s(b)(3)(C). As a result, the Commission may suspend a 
national securities exchange's proposed rule change, even if the 
change was eligible to be effective upon filing with the Commission.
---------------------------------------------------------------------------

    Under proposed Rule 304(a)(1)(iv), an NMS Stock ATS that had filed 
a Form ATS-N Amendment that has been declared ineffective would be able 
to subsequently file a new Form ATS-N Amendment. This would allow an 
NMS Stock ATS to attempt to address any disclosure deficiencies or 
compliance issues that caused a Form ATS-N Amendment to be declared 
ineffective.
Request for Comment
    83. Should the Commission adopt the proposal to declare ineffective 
any Form ATS-N Amendment if it finds that such action is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors? Why or why not? Please support your arguments.
    84. Do you believe that the Commission should affirmatively declare 
material amendments to Form ATS-N effective? Why or why not? If so, do 
you believe the Commission should declare material changes to Form ATS-
N effective before the NMS Stock ATS implements the material change? 
Why or why not? Please support your arguments.
    85. Do you believe that the Commission should provide a longer time 
period for the Commission to review material amendments to Form ATS-N 
(e.g., 45 calendar days) and a shorter period of time for the NMS Stock 
ATS to be able to implement the material change (e.g., 10, 20, or 30 
calendar days)? Why or why not? Please support your arguments. Do you 
believe that a longer Commission review period coupled with a shorter 
advance notice period would balance the burdens on an NMS Stock ATS 
that would be required to provide advance notice of a material change 
to the operations of the NMS Stock ATS with the time necessary for the 
Commission to review a Form ATS-N material amendment? Why or why not? 
Please support your arguments. Do you believe a longer Commission 
review period coupled with a shorter advance notice period would lead 
to practical challenges (e.g., confusion among market participants or 
difficulty to NMS Stock ATSs to unwind a change)? Please support your 
arguments.
    86. Do you believe that a Form ATS-N Amendment should become 
effective by operation of rule if the Commission does not affirmatively 
declare it ineffective? Why or why not? Please support your arguments.
    87. Do you believe that the proposed 30 calendar days from filing 
with the Commission is a reasonable time period for the Commission to 
declare a Form ATS-N Amendment ineffective? Do you believe it would 
place an undue burden on the NMS Stock ATS that filed the Form ATS-N 
Amendment? If so, why, and what would be a reasonable amount of time? 
Please support your arguments. Do you believe that a longer period of 
time (e.g., 45 days) for the Commission to declare a Form ATS-N 
Amendment ineffective would be reasonable? Why or why not? Please 
support your arguments. Do you believe that a longer period of time 
would place an undue burden on the NMS Stock ATS that filed the Form 
ATS-N Amendment? Why or why not? Please support your arguments.

[[Page 81031]]

    88. Do you believe the Commission should adopt a process to extend 
its review period for a Form ATS-N Amendment similar to the processes 
being proposed under proposed Rule 304(a)(1)(ii) for initial Form ATS-N 
filings? Why or why not? Please support your arguments. If so, how long 
should the extension of the review period be (e.g., 10, 15, 20, or 30 
calendar days) and should the process apply to material amendments, 
periodic amendments, amendments to correct information in any previous 
Form ATS-N filing that was inaccurate or incomplete when filed, or all 
categories of Form ATS-N Amendments? Should the process differ 
depending on the category of amendment? Please be specific.
    89. Should the Commission adopt the proposal that a Form ATS-N 
Amendment should become effective without the Commission issuing an 
order declaring effective the relevant Form ATS-N Amendment? Do you 
believe that the lack of a Commission order declaring a Form ATS-N 
Amendment ineffective within 30 calendar days from filing would provide 
an NMS Stock ATS sufficient notice that a Form ATS-N Amendment has 
become effective? Why or why not? Please support your arguments.
    90. Do you believe that a determination of ineffectiveness of a 
Form ATS-N Amendment should be subject to notice and hearing, as is the 
case with initial determinations about Form ATS-N? Why or why not? 
Please support your arguments.
7. Proposed Rule 304(a)(3): Notice of Cessation
    Proposed Rule 304(a)(3) would require an NMS Stock ATS to notice 
its cessation of operations on Form ATS-N at least 10 business days 
before the date the NMS Stock ATS ceases to operate as an NMS Stock 
ATS.\318\ The notice of cessation would cause the Form ATS-N to become 
ineffective on the date designated by the NMS Stock ATS. Requiring an 
NMS Stock ATS to file a Form ATS-N notice of cessation at least 10 
business days before the date the NMS Stock ATS ceases operations would 
provide notice to the public and the Commission that the NMS Stock ATS 
intends to cease operations. By making the notices of cessation public, 
as discussed herein,\319\ the Commission preliminarily believes that 
all market participants that had routed orders to the NMS Stock ATS 
would be able to make arrangements to select alternative routing 
destinations for their orders. Regulation ATS currently requires an ATS 
to ``promptly file a cessation of operations report on Form ATS'' upon 
ceasing to operate.\320\ Proposed Rule 304(a)(3) would require an NMS 
Stock ATS to disclose on Form ATS-N the date it will cease operating at 
least 10 business days before doing so. The Commission preliminarily 
believes that the proposal to require NMS Stock ATSs to provide notice 
at least 10 business days before the date an NMS Stock ATS ceases to 
operate is a reasonable period for the NMS Stock ATS to provide market 
participants and the Commission with notice that it intends to cease 
operations, as market participants would have adequate time to find and 
select other routing destinations for their orders.
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    \318\ The Commission would post a notice of cessation upon 
completing its review for accuracy and completion.
    \319\ See infra Section V (discussing public disclosure of 
filings on Form ATS-N, including cessation of operation reports).
    \320\ 17 CFR 242.301(b)(2)(v).
---------------------------------------------------------------------------

Request for Comment
    91. Should the Commission require an NMS Stock ATS to give notice 
that it intends to cease operations 10 business days or more before 
ceasing operations as an NMS Stock ATS? If so, why and how much advance 
notice is appropriate? If not, why not? Please support your arguments.
    92. Should the Commission allow an NMS Stock ATS to notice its 
cessation of operations after it has ceased operations, as is currently 
the requirement under Regulation ATS, or at the same time that it 
ceases operations? If so, why and how long after the NMS Stock ATS has 
ceased operations? If not, why not? Please support your arguments.
    93. Should the Commission create a process to revoke the exemption 
from Rule 3a1-1(a)(2) if the NMS Stock ATS reports no volume for two 
consecutive quarters, four consecutive quarters, eight consecutive 
quarters, or over some other time period? Why or why not? Are there any 
other circumstances under which the Commission should revoke the 
exemption if the NMS Stock ATS appears to be inactive? Please support 
your arguments.
8. Proposed Rule 304(a)(4): Suspension, Limitation, or Revocation of 
the Exemption From the Definition of Exchange
    To rely on an exemption from the Exchange Act or the rules and 
regulations thereunder granted by the Commission, the person seeking 
the exemption must comply with the conditions to the exemption 
established by the Commission. A person that fails to comply with those 
conditions would therefore fall outside of the scope of the 
exemption.\321\ In adopting Exchange Act Rule 3a1-1(a)(2) and 
Regulation ATS, the Commission established conditions under which an 
ATS would be exempt from the definition of ``exchange,'' and therefore 
would not be required to register as a national securities exchange. 
Rule 3a1-1(a)(2) provides that a system that meets the criteria of Rule 
3b-16 is exempt from the definition of ``exchange'' on condition that 
the system complies with Regulation ATS. As discussed above, the 
Commission is proposing to expand the set of conditions that an NMS 
Stock ATS would need to satisfy to qualify for the exemption provided 
under Rule 3a1-1(a)(2).
---------------------------------------------------------------------------

    \321\ See proposed Rule 304(a)(4)(iv).
---------------------------------------------------------------------------

    The Commission is proposing to amend Regulation ATS to include 
proposed Rule 304(a)(4), to provide a process for the Commission to 
suspend for a period not exceeding twelve months,\322\ limit, or revoke 
an NMS Stock ATS's exemption from the definition of the term exchange 
pursuant to Rule 3a1-1(a)(2) under certain circumstances. Regulation 
ATS currently does not provide a process for the Commission to suspend, 
limit, or revoke the exemption under which an ATS operates other than 
pursuant to the Commission's general enforcement authority.\323\ The 
Commission is proposing Rule 304(a)(4)(i), which would provide that the 
Commission will, by order, if it finds, after notice and opportunity 
for hearing, that such action is necessary or appropriate in the public 
interest, and is consistent with the protection of investors, suspend 
for

[[Page 81032]]

a period not exceeding twelve months, limit, or revoke an NMS Stock 
ATS's exemption from the definition of ``exchange'' pursuant to Rule 
3a1-1(a)(2).\324\ Proposed Rule 304(a)(4)(ii) would make clear that if 
an NMS Stock ATS's exemption is suspended or revoked pursuant to 
proposed Rule 304(a)(4)(i), the NMS Stock ATS would be prohibited from 
operating pursuant to the exemption from the definition of ``exchange'' 
provided under Rule 3a1-1(a)(2); if an NMS Stock ATS's exemption is 
limited pursuant to proposed Rule 304(a)(4)(i), the NMS Stock ATS would 
be prohibited from operating in a manner inconsistent with the terms 
and conditions of the Commission order.
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    \322\ The proposed limitation on the time frame for suspension 
is consistent with federal securities law provisions pursuant to 
which the Commission may suspend the activities or registration of a 
regulated entity. See, e.g., Section 15(b)(4) (15 U.S.C. 78o(b)(4)) 
and 15B(c)(2) (15 U.S.C. 78o-4(c)(2)).
    \323\ See generally Exchange Act Section 21C (15 U.S.C 78u-3). 
Use of the proposed process whereby the Commission could suspend, 
limit, or revoke an NMS Stock ATS's Rule 3a1-1(a)(2) exemption would 
not preclude the Commission from using its general enforcement 
authority, or other specific enforcement authority that may be 
applicable such as, for example, pursuant to Section 15(b)(4) and 
15(c) (15 U.S.C. 78o(b)(4); 15 U.S.C. 78o(c)). Rather, it would 
provide an additional means of helping to ensure that NMS Stock ATSs 
that no longer qualify for the Rule 3a1-1(a)(2) exemption are unable 
to take advantage of it. For example, if an NMS Stock ATS failed to 
file a Form ATS-N Amendment to disclose material changes to the 
operation of the NMS Stock ATS, the Commission could invoke the 
process to suspend, limit or revoke the NMS Stock ATS's exemption, 
but would not be precluded from bringing an action against the 
broker-dealer operator of the NMS Stock ATS for failing to comply 
with Rule 304(a)(2), or violating the antifraud provisions of the 
federal securities laws.
    \324\ See proposed Rule 304(a)(4)(i).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to 
provide a process by which the Commission may, by order, suspend, 
limit, or revoke an NMS Stock ATS's exemption from the definition of 
``exchange'' if the NMS Stock ATS is operating in a manner such that 
the exemption from the definition of ``exchange'' for the NMS Stock ATS 
is not necessary or appropriate in the public interest, or consistent 
with the protection of investors. For example, in making a 
determination as to whether suspension, limitation, or revocation of an 
NMS Stock ATS's exemption is necessary or appropriate in the public 
interest, and is consistent with the protection of investors, the 
Commission would take into account whether the entity no longer meets 
the definition of NMS Stock ATS under Rule 300(a)(k), does not comply 
with the conditions to the exemption (in that it fails to comply with 
any part of Regulation ATS, including proposed Rule 304), or otherwise 
violates any provision of federal securities laws.
    The Commission preliminarily believes, for example, that it would 
be appropriate to provide for the suspension, limitation, or revocation 
of an NMS Stock ATS's exemption from the definition of ``exchange'' 
pursuant to Rule 3a1-1(a)(2) if the Commission finds that an NMS Stock 
ATS no longer meets the definition of ``NMS Stock ATS.'' \325\ If a 
system does not meet the functional test of an ``exchange'' under Rule 
3b-16, it would not be eligible for the exemption from the definition 
of ``exchange'' pursuant to Rule 3a1-1(a)(2) as it is not an 
``exchange'' in the first instance.\326\ If an NMS Stock ATS no longer 
meets the criteria of Rule 3b-16--or meets the criteria of Rule 3b-16 
but no longer effects transactions in NMS stocks--or otherwise does not 
meet the definition of an alternative trading system, it would not 
continue to be eligible for the exemption in Rule 3a1-1(a)(2) even if 
it had met the definition of an NMS Stock ATS at the time that the 
Commission declared its Form ATS-N effective. Permitting a system to 
operate that does not otherwise meet the definition of an NMS Stock ATS 
would deny investors appropriate regulatory protection and could also 
be misleading to investors.
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    \325\ The Commission preliminarily believes that a determination 
as to whether to suspend, limit, or revoke an NMS Stock ATS's 
exemption would depend on the particular facts and circumstances; 
however, the Commission also preliminarily believes that revocation 
would be the appropriate course of action if the Commission finds 
that an entity no longer meets the definition of NMS Stock ATS or 
otherwise satisfies the criteria of the functional test under Rule 
3b-16.
    \326\ See supra Section IV.A. (discussing the definition of NMS 
Stock ATS and the availability of the Rule 3a1-1(a)(2) exemption).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that it would be 
appropriate to provide for the suspension, limitation, or revocation of 
an NMS Stock ATS's exemption from the definition of exchange pursuant 
to Rule 3a1-1(a)(2) if, for example, the Commission finds that an NMS 
Stock ATS fails to comply with any part of Regulation ATS, including 
proposed Rule 304. As discussed in the Regulation ATS Adopting Release, 
instead of imposing requirements applicable to national securities 
exchanges, the Commission adopted enhanced regulation for ATSs that 
would provide more protections for investors who used the systems.\327\ 
To the extent that an NMS Stock ATS fails to comply with the conditions 
set forth in Regulation ATS, investors would no longer be protected by 
the conditions of Regulation ATS or the protections afforded by the 
provisions of the Exchange Act and the rules thereunder that apply to 
national securities exchanges. For example, pursuant to proposed Rule 
304(a)(4)(i), the Commission would suspend, limit, or revoke an NMS 
Stock ATS's exemption from the definition of ``exchange'' if it finds, 
after notice and opportunity for hearing, that such action is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors, because the NMS Stock ATS is no longer a 
registered broker-dealer, which is a requirement of Regulation 
ATS.\328\ The Commission would also suspend, limit, or revoke an NMS 
Stock ATS's exemption if the Commission finds, after notice and 
opportunity for hearing, that such action is necessary or appropriate 
in the public interest, and is consistent with the protection of 
investors, because, for example, the ATS's Form ATS-N contains 
inaccurate or incomplete responses. Proposed Form ATS-N would be a 
public reporting document that is designed to provide the Commission 
and market participants with information about the operations of the 
NMS Stock ATS and the circumstances under which the activities of the 
broker-dealer operator of the NMS Stock ATS and its affiliates may give 
rise to potential conflicts of interest. The Commission preliminarily 
believes that market participants would likely use the information 
provided on Form ATS-N to make decisions about where to route orders. 
The Commission is concerned that information provided on Form ATS-N 
that is inaccurate or incomplete could misinform or mislead market 
participants about the operations of the NMS Stock ATS or the 
activities of the broker-dealer operator, including how their orders 
may be handled and executed, and impact their decisions about where 
they should route their orders. To prevent an NMS Stock ATS from 
potentially misinforming or misleading market participants about the 
operations of the system, proposed Rule 304(a)(4) would provide a 
process for the Commission to suspend, limit, or revoke the NMS Stock 
ATS's Rule 3a1-1(a)(2) exemption.
---------------------------------------------------------------------------

    \327\ See Regulation ATS Adopting Release, supra note 7, at 
70857.
    \328\ See 17 CFR 242.301(b)(1).
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily believes that it would 
be appropriate to provide for the suspension, limitation, or revocation 
of an NMS Stock ATS's exemption from the definition of exchange 
pursuant to Rule 3a1-1(a)(2) if, for example, the Commission finds, 
after notice and opportunity for hearing, that such action is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors, because that NMS Stock ATS has violated or is 
violating any provision of the federal securities laws. The Commission 
is concerned that market participants may be harmed by an NMS Stock ATS 
that is, for example, providing false or misleading information to 
market participants, and preliminarily believes that such an NMS Stock 
ATS should not be able to continue to operate pursuant to an exemption 
provided by the Commission.
    Pursuant to proposed Rule 304(a)(4)(ii), an NMS Stock ATS whose 
exemption had been suspended or revoked would be prohibited from 
operating pursuant to the Rule 3a1-1(a)(2) exemption; and if an NMS 
Stock ATS were to continue to engage in Rule 3b-16 activity in NMS 
stocks without the exemption, it would be an

[[Page 81033]]

unregistered exchange because it would no longer qualify for the 
exemption from the exchange definition.\329\ If an NMS Stock ATS's 
exemption was limited pursuant to proposed Rule 304(a)(4)(iv), the NMS 
Stock ATS would be prohibited from operating in a manner otherwise 
inconsistent with the terms and conditions of the Commission order, and 
if it did operate in a manner inconsistent with the terms and 
conditions of the order, would risk operating as an unregistered 
national securities exchange. The exemption provided under Rule 3a1-
1(a)(2) is conditional upon initial and ongoing compliance with 
Regulation ATS. The proposed process for suspending, limiting, or 
revoking an NMS Stock ATS's exemption, in the event the Commission 
finds, for example, that there is a failure to adhere to the conditions 
of the exemption and that suspending, limiting, or revoking the 
exemption is necessary or appropriate in the public interest, and is 
consistent with the protection of investors, is designed to protect 
investors in the case of potential non-compliance by an NMS Stock ATS 
with the conditions with which the NMS Stock ATS must adhere in order 
to continue to qualify for an exemption from the statutory definition 
of ``exchange.''
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    \329\ If the Commission revoked the exemption of an NMS Stock 
ATS and the NMS Stock ATS wished to continue operations, the entity 
could do so only if it was registered as a national securities 
exchange pursuant to Section 6 of the Exchange Act or was exempted 
by the Commission from such registration based on the limited volume 
of transactions effected on such exchange, or seeks another 
exemption. See 17 CFR 242.301(a)(1)-(2). The NMS Stock ATS would not 
be prohibited from filing a new Form ATS-N, pursuant to proposed 
Rule 304(a)(1).
     An NMS Stock ATS that has had its exemption suspended or 
limited may, depending on the facts and circumstances, be able to 
file a Form ATS-N Amendment or revise its operations to come into 
compliance with the conditions of the exemption or the provision of 
any other federal securities law that may have been the basis of the 
Commission's findings.
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    The Commission also preliminarily believes that providing a process 
by which the Commission can determine to suspend, limit, or revoke an 
NMS Stock ATS's exemption from the definition of ``exchange'' would 
provide appropriate flexibility to address the specific facts and 
circumstances of an NMS Stock ATS's failure to comply with Regulation 
ATS or the nature of the violation of federal securities laws, and the 
possible harm to investors as a result of the non-compliance or 
violation. For example, the Commission preliminarily believes that 
providing a process by which the Commission could limit the exemption 
provided in Rule 3a1-1(a)(2) would provide flexibility to address 
specific disclosures or activities that are the cause of the non-
compliance with Regulation ATS or that violate federal securities laws. 
For illustration, if the Commission found that an NMS Stock ATS 
implemented a material change to its operations, but failed to disclose 
the material change on its Form ATS-N, the Commission could determine 
to allow the NMS Stock ATS to continue to operate as disclosed on its 
Form ATS-N, but prohibit the NMS Stock ATS from engaging in the 
undisclosed activity until the NMS Stock ATS properly amends its Form 
ATS-N in accordance with proposed Rule 304(a)(2). If the Commission 
found that an NMS Stock ATS offered an order type that resulted in 
violations of the Commission's rules restricting the acceptance and 
ranking of orders in impermissible sub-penny increments, the Commission 
could allow the NMS Stock ATS to continue to operate but prohibit the 
NMS Stock ATS from offering the order type, if it found that doing so 
was necessary or appropriate in the public interest, and consistent 
with the protection of investors. The Commission preliminarily believes 
that, depending on the facts and circumstances, it may be more 
appropriate in the public interest, and consistent with the protection 
of investors, to limit the scope of an NMS Stock ATS's exemption, 
instead of revoking or suspending the exemption and causing the NMS 
Stock ATS to cease operations. In comparison, the Commission 
preliminarily believes it would be more appropriate to revoke the 
exemption of an NMS Stock ATS that no longer meets the definition of 
NMS Stock ATS or is no longer a registered broker-dealer, as these 
conditions are fundamental to the exemption. Additionally, the 
Commission preliminarily believes that it would be necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to revoke the exemption of an NMS Stock ATS if, for 
example, the ATS is found to be violating the antifraud provisions of 
the federal securities laws. Nonetheless, the entry of an order 
revoking an NMS Stock ATS's exemption would not prohibit the broker-
dealer operator of the NMS Stock ATS from continuing its other broker-
dealer operations.
    The Commission is also proposing that prior to issuing an order 
suspending, limiting, or revoking an NMS Stock ATS's exemption pursuant 
to proposed Rule 304(a)(4)(i), the Commission would provide notice and 
opportunity for hearing to the NMS Stock ATS, and make the findings 
specified in proposed Rule 304(a)(4)(i) described above, that, in the 
Commission's opinion, the suspension, limitation or revocation is 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors. The Commission preliminarily believes that 
the proposed process of providing an NMS Stock ATS with notice and 
opportunity for hearing provides the NMS Stock ATS with adequate 
opportunity to respond before the Commission determines that the NMS 
Stock ATS's exemption from the definition of ``exchange'' is no longer 
appropriate in the public interest or consistent with the protection of 
investors. The Commission also preliminarily believes that the 
possibility that the Commission may suspend, limit, or revoke an NMS 
Stock ATS's exemption from the definition of ``exchange'' would not be 
unduly burdensome because an NMS Stock ATS would be given advance 
notice and have an opportunity to respond, and, depending on the facts 
and circumstances, revise its operations or disclosures on Form ATS-N 
to bring its operations or disclosures into compliance with Regulation 
ATS or federal securities laws. The Commission preliminarily believes 
that proposed Rule 304(a)(4) would provide the Commission with an 
appropriate tool, which is subject to notice and hearing safeguards, to 
protect the investing public and the public interest from an NMS Stock 
ATS that fails to comply with Regulation ATS or otherwise violates any 
provision of the federal securities laws.
Request for Comment
    94. Do you believe the proposed process for the Commission to 
suspend, limit, or revoke an NMS Stock ATS's exemption from the 
definition of ``exchange'' is necessary or appropriate to protect 
investors and other market participants and maintain fair and orderly 
markets? Why or why not? Please support your arguments.
    95. What criteria should the Commission use in deciding whether to 
suspend, limit, or revoke an NMS Stock ATS's exemption as proposed? Are 
there alternative actions or processes the Commission should consider 
for suspending, limiting, or revoking the exemption? Please support 
your arguments and provide details.
    96. Should the Commission adopt the proposal to provide flexibility 
as to whether to suspend, limit, or revoke an NMS Stock ATS's exemption 
depending on the facts and circumstances and possible harm to 
investors? If so, why? If not, what other criteria, if any, should

[[Page 81034]]

the Commission use in deciding whether to suspend, limit, or revoke the 
exemption? Please support your arguments.
    97. Do you believe there should be a maximum time frame following 
notice and opportunity for hearing within which the Commission should 
be required to act? If so, why, and what would be the appropriate time 
frame? If not, why not? Please support your arguments.
    98. Do you believe that 12 months is the appropriate limit on the 
amount of time by which the Commission could suspend an NMS Stock ATS's 
exemption? If so, why? If not, why not, and what would be the 
appropriate time frame? Please support your arguments.
    99. Do you believe that the Commission's proposal to declare 
ineffective a Form ATS-N Amendment if it finds that such action is 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors, is appropriate as a supplement to the 
proposal that the Commission suspend, limit, or revoke an NMS Stock 
ATS's exemption from the definition of ``exchange'' under proposed Rule 
304(a)(4)? Why or why not? Please support your arguments.
    100. Do you believe there are other processes by which the 
Commission should enforce the conditions to the Rule 3a1-1(a)(2) 
exemption? If so, what are they and why would they be preferable to the 
proposed process?

D. Rule 304(b): Public Disclosure of Form ATS-N and Related Commission 
Orders

    The Commission is proposing to make public certain Form ATS-N 
reports filed by NMS Stock ATSs.\330\ Commission orders related to the 
effectiveness of Form ATS-N will also be publicly posted on the 
Commission's Web site. As discussed above, there currently is limited 
information available to the public about the operations of ATSs that 
trade NMS stocks and the activities of their broker-dealer operators 
and the broker-dealer operators' affiliates.\331\ Furthermore, as 
discussed further below, market participants may not be informed about 
potential conflicts of interest that arise as a result of the other 
business activities of the broker-dealer operator of the NMS Stock ATS, 
or its affiliates, such as trading NMS stocks on the NMS Stock ATS or 
operating multiple trading centers, including multiple ATSs.\332\ The 
only information the Commission currently makes publicly available 
regarding ATSs is a list, which is updated monthly, of ATSs with a Form 
ATS on file with the Commission.\333\ Therefore, the Commission is 
proposing Rule 304(b) to mandate greater public disclosure of NMS Stock 
ATS operations through the publication of Form ATS-N and to provide for 
the posting of Commission orders on the Commission's Web site related 
to the effectiveness of Form ATS-N.
---------------------------------------------------------------------------

    \330\ See proposed Rule 304(b)(1) (providing that every Form 
ATS-N filed pursuant to Rule 304 shall constitute a ``report'' 
within the meaning of Sections 11A, 17(a), 18(a), and 32(a) and any 
other applicable provisions of the Exchange Act).
    \331\ See supra Section III.C.
    \332\ See infra Section VII.
    \333\ See Alternative Trading System (``ATS'') List, http://www.sec.gov/foia/docs/atslist.htm.
---------------------------------------------------------------------------

    First, the Commission is proposing Rule 304(b)(1) to provide that 
every Form ATS-N filed pursuant to Rule 304 shall constitute a 
``report'' within the meaning of Sections 11A, 17(a), 18(a), and 32(a) 
and any other applicable provisions of the Exchange Act. Because 
proposed Form ATS-N is a report that is required to be filed under the 
Exchange Act, it would be unlawful for any person to willfully or 
knowingly make, or cause to be made, a false or misleading statement 
with respect to any material fact in Form ATS-N.\334\ The Commission 
notes that proposed Rule 304(b)(1) is nearly identical to current Rule 
301(b)(2)(vi),\335\ which provides that every notice or amendment filed 
pursuant to Rule 301(b)(2), including Form ATS, shall constitute a 
``report'' within the meaning of Sections 11A, 17(a), 18(a), and 32(a), 
and any other applicable provisions of the Exchange Act.\336\
---------------------------------------------------------------------------

    \334\ See 15 U.S.C. 78ff(a).
    \335\ 17 CFR 242.301(b)(2)(vi).
    \336\ 15 U.S.C. 78k-1, 78q(a), 78r(a), and 78ff(a). See 17 CFR 
242.301(b)(2)(vi).
---------------------------------------------------------------------------

    Under proposed Rule 304(b)(2), the Commission would make public via 
posting on the Commission's Web site, each: (i) Order of effectiveness 
of a Form ATS-N; (ii) order of ineffectiveness of a Form ATS-N; (iii) 
effective Form ATS-N; (iv) filed Form ATS-N Amendment; (v) order of 
ineffectiveness of a Form ATS-N Amendment; (vi) notice of cessation; 
and (vii) order suspending, limiting, or revoking the exemption from 
the definition of an ``exchange'' pursuant to Exchange Act Rule 3a1-
1(a)(2). Proposed Rule 304(b)(3) would require each NMS Stock ATS to 
make public via posting on its Web site a direct URL hyperlink to the 
Commission's Web site that contains the documents enumerated in 
proposed Rule 304(b)(2).
    Once the Commission has declared a Form ATS-N effective, the 
Commission preliminarily believes that making Form ATS-N public would 
provide market participants with important information about the 
operations of the NMS Stock ATS and its broker-dealer operator and the 
broker-dealer operator's affiliates. As discussed further below, 
proposed Form ATS-N would provide information about the broker-dealer 
operator and the activities of the broker-dealer operator and its 
affiliates in connection with the NMS Stock ATS, including: Their 
operation of trading centers and other NMS Stock ATSs; products and 
services offered to subscribers; arrangements with unaffiliated trading 
centers; trading activities on the NMS Stock ATS; smart order router 
(or similar functionality) and algorithms used to send or receive 
orders or other trading interest to or from the ATS; personnel and 
third parties used to operate the NMS Stock ATS; differences in the 
availability of ATS services, functionalities, or procedures; and 
safeguards and procedures to protect subscribers' confidential trading 
information.\337\ Proposed Form ATS-N would also provide market 
participants with important information about the manner of operations 
of the NMS Stock ATS, including: subscribers; hours of operation; types 
of orders; connectivity, order entry, and co-location procedures; 
segmentation of order flow and notice about segmentation; display of 
order and other trading interest; trading services, including matching 
methodologies, order interaction rules, and order handling, and 
execution procedures; procedures governing suspension of trading and 
trading during a system disruption or malfunction; opening, re-opening, 
closing, and after hours procedures; outbound routing services; fees; 
market data; trade reporting; clearance and settlement; order display 
and execution access; fair access; and market quality statistics 
published or provided to one or more subscribers.\338\ Accordingly, the 
Commission proposes to make public--via the public posting of Form ATS-
N on the Commission's Web site--information that it preliminarily 
believes should be easily accessible to all market participants so that 
market participants may better evaluate how to achieve their investing 
or trading objectives.
---------------------------------------------------------------------------

    \337\ See infra Section VII (discussing proposed disclosure 
requirements related to broker-dealer operators under Form ATS-N).
    \338\ See infra Section VIII (discussing proposed operational 
disclosure requirements of Form ATS-N).
---------------------------------------------------------------------------

    The Commission would not post on its Web site a filed Form ATS-N 
before the Commission declares that Form ATS-N effective. Under the 
proposal, an NMS Stock ATS that was not in

[[Page 81035]]

operation as of the effective date of proposed Rule 304 may not 
commence operations as an NMS Stock ATS until the Commission issues an 
order declaring its Form ATS-N effective.\339\ Additionally, if the 
Commission declares ineffective a Form ATS-N filed by a legacy NMS 
Stock ATS, that ATS would be prohibited from operating as an NMS Stock 
ATS going forward.\340\ Furthermore, while the Commission is reviewing 
a Form ATS-N prior to declaring it effective or ineffective, Commission 
staff would likely engage in discussions with the entity regarding its 
disclosures and could request that the entity revise or augment its 
disclosures to provide market participants with greater clarity 
regarding the entity's operations. Accordingly, the Commission 
preliminarily believes that it would be premature to provide market 
participants with information regarding an initial Form ATS-N filing 
until after it is declared effective.
---------------------------------------------------------------------------

    \339\ See proposed Rule 304(a)(1)(iv).
    \340\ Id. Nothing would preclude the NMS Stock ATS from later 
submitting a new or revised Form ATS-N for consideration by the 
Commission.
---------------------------------------------------------------------------

    The proposal to make public each Form ATS-N Amendment upon filing 
with the Commission is to provide market participants with immediate 
transparency into the operations of an NMS Stock ATS, which would be 
operational and to which market participants might currently enter--or 
consider entering--orders for execution. The Commission preliminarily 
believes that making public Form ATS-N Amendments would benefit market 
participants by allowing them to obtain current information regarding 
changes to the operation of an NMS Stock ATS and its relationship with 
its broker-dealer operator and the broker-dealer operator's affiliates; 
if it would benefit their investment or trading strategies, market 
participants would also be able to continually evaluate that NMS Stock 
ATS as a potential destination to route their orders. The Commission 
preliminarily believes that, while Form ATS-N Amendments would be 
publicly posted before the Commission has completed its review, it 
would be useful to market participants to have immediate access to the 
disclosures contained in an amendment so market participants may, for 
example, assess and prepare for upcoming material changes on an NMS 
Stock ATS or more quickly understand any operational changes that have 
occurred over the previous quarter on the NMS Stock ATS. The Commission 
also proposes to make the public aware of which Form ATS-N Amendments 
filed by NMS Stock ATSs posted on the Commission's Web site are pending 
Commission review and could still be declared ineffective. The 
Commission believes that publicly posting filed Form ATS-N Amendments 
would strike the right balance of enabling market participants to 
better understand upcoming or recent changes to an operational NMS 
Stock ATS in a timely manner, while informing market participants that 
the Form ATS-N Amendment is pending Commission review and could still 
be declared ineffective.\341\
---------------------------------------------------------------------------

    \341\ Market participants would also be made aware if the 
Commission declares a Form ATS-N Amendment ineffective, because the 
Commission would also post each order of ineffectiveness of a Form 
ATS-N Amendment. See proposed Rule 304(b)(2)(E).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that making public each 
properly filed Form ATS-N notice of cessation would provide the public 
with notice that the NMS Stock ATS will cease operations and that the 
organization, association, or group of persons no longer operates 
pursuant to the exemption provided under Exchange Act Rule 3a1-1(a)(2). 
The notice of cessation would provide market participants with the date 
that the NMS Stock ATS will cease operations, as designated by the NMS 
Stock ATS. Market participants would be able to use this information to 
make arrangements to select alternative routing destinations for their 
orders.
    Furthermore, the Commission understands that many broker-dealer 
operators maintain Web sites for their NMS Stock ATSs. The Commission 
preliminarily believes that market participants would find it helpful 
for an NMS Stock ATS to make market participants aware that certain of 
the NMS Stock ATS's Form ATS-N filings are publicly posted on the 
Commission's Web site. Therefore, to the extent that an NMS Stock ATS 
has a public Web site, the Commission is proposing that Rule 304(b)(3) 
require each NMS Stock ATS that has a Web site to post on the NMS Stock 
ATS's Web site a direct URL hyperlink to the Commission's Web site that 
contains the documents enumerated in proposed Rule 304(b)(2), which 
includes the NMS Stock ATS's Form ATS-N filings. The Commission 
preliminarily believes that this requirement would make it easier for 
market participants to review an NMS Stock ATS's Form ATS-N filings by 
providing an additional means for market participants to locate Form 
ATS-N filings that are posted on the Commission's Web site.
    The Commission preliminarily believes that publicly posting Form 
ATS-N filings on the timelines described above is important because 
most market participants do not have access to information that permits 
them to adequately compare and contrast how some NMS Stock ATSs would 
handle their orders against how a given national securities exchange or 
other NMS Stock ATS would handle their orders. Currently, a Form ATS 
filed with the Commission by an NMS Stock ATS is ``deemed confidential 
when filed'' under Rule 301(b)(2)(vii) of Regulation ATS,\342\ whereas 
a national securities exchange is required to both (i) make available 
to the public its entire rule book and (ii) publicly file all proposed 
rule changes pursuant to Section 19(b) of the Exchange Act.\343\ The 
Commission preliminary believes 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.\344\ Unless an NMS 
Stock ATS voluntarily publicizes how those functionalities operate and 
affect the handling of subscriber orders, there is no publicly 
available information for market participants to use in order to 
compare and contrast the trading platform of an NMS Stock ATS with that 
of a national securities exchange. Accordingly, through Form ATS-N, the 
Commission proposes to require disclosures that would provide 
information that market participants could use to compare and contrast 
the important order handling features, and other important 
functionalities, of an NMS Stock ATS with those of other NMS Stock ATSs 
or national securities exchanges. The Commission therefore proposes to 
make those disclosures public so that market participants would have 
access to important information when evaluating trading venues.
---------------------------------------------------------------------------

    \342\ See 17 CFR 240.301(b)(2)(vii).
    \343\ See 15 U.S.C. 78s(b).
    \344\ See supra Section III.B.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily believes that, given 
changes with respect to NMS Stock ATSs since the adoption of Regulation 
ATS,\345\ the reasons given in the past for maintaining the 
confidentiality of Form ATS filings are no longer justified for NMS 
Stock ATSs in light of the benefits of operational transparency for NMS 
Stock ATSs that are discussed above. First, when the Commission adopted 
Regulation ATS, it chose, at that time, to deem Form ATS confidential 
because ``[i]nformation required on Form ATS

[[Page 81036]]

may be proprietary and disclosure of such information could place 
alternative trading systems in a disadvantageous competitive 
position.'' \346\ As noted above, the Commission preliminarily believes 
that NMS Stock ATSs have generally evolved to the point that their 
trading functionalities often resemble those of national securities 
exchanges.\347\ The Commission preliminarily believes that much of the 
type and level of information that would have to be publicly disclosed 
by an NMS Stock ATS pursuant to this proposal is very similar to 
information that national securities exchanges must publicly disclose. 
For instance, proposed Form ATS-N would require an NMS Stock ATS to 
disclose, among other things, information about available order types 
and modifiers, hours of operations, connectivity, order entry, co-
location, order display, matching methodologies, and order interaction 
procedures, all of which must be publicly disclosed by national 
securities exchanges. Accordingly, the Commission preliminarily 
believes that, in the current market environment, the disclosures 
mandated by Form ATS-N would not place NMS Stock ATSs at a competitive 
disadvantage with respect to national securities exchanges.\348\
---------------------------------------------------------------------------

    \345\ See generally supra Section III.
    \346\ See Regulation ATS Adopting Release, supra note 7, at 
70864.
    \347\ See supra Section III.B.
    \348\ See infra Section XIII.C.2.
---------------------------------------------------------------------------

    Second, when the Commission adopted Regulation ATS, it sought to 
``encourage candid and complete filings in order to make informed 
decisions and track market changes,'' and believed that keeping the 
reports filed on Form ATS confidential would ``provide[] respondents 
with the necessary comfort to make full and complete filings.'' \349\ 
Based on Commission experience, however, many Form ATS filings 
currently provide only rudimentary and summary information about the 
manner of operation of NMS Stock ATSs, which often requires the 
Commission and its staff to ask the ATSs follow-up questions, and 
results in ATSs filing follow-up amendments, to fully disclose how they 
operate. Thus, the Commission preliminarily believes that maintaining 
the confidentiality of Form ATS filings with regard to NMS Stock ATSs 
has not resulted uniformly in ATSs ``mak[ing] full and complete 
filings.''
---------------------------------------------------------------------------

    \349\ See Regulation ATS Adopting Release, supra note 7, at 
70864.
---------------------------------------------------------------------------

Request for Comment
    101. Do you believe market participants currently have access to 
information about the operations of NMS Stock ATSs and the activities 
of their broker-dealer operators and the broker-dealer operators' 
affiliates, either through private disclosures from NMS Stock ATSs, 
from NMS Stock ATSs that voluntarily make their Forms ATS public, or 
from NMS Stock ATSs that issue frequently asked questions about their 
operations, including changes to their operations, that is sufficient 
to help market participants select the markets to which to route and 
execute their orders? Why or why not? Please support your arguments.
    102. Do you believe the Commission should adopt the proposal to 
make public certain Form ATS-N filings by NMS Stock ATSs? Why or why 
not? Please support your arguments.
    103. Do you believe the Commission should adopt the proposal to 
require an NMS Stock ATS to post on the NMS Stock ATS's Web site a 
direct URL hyperlink to the Commission's Web site that contains the 
documents enumerated in proposed Rule 304(b)(2)? Why or why not? Please 
support your arguments.
    104. Do you believe the Commission should require each NMS Stock 
ATS to directly post its Form ATS-N filings on the NMS Stock ATS's Web 
site? If so, why, and which Form ATS-N filings? If not, why not? Please 
support your arguments.
    105. Do you believe the Commission should require each NMS Stock 
ATS to directly post Commission orders related to the effectiveness or 
ineffectiveness of the NMS Stock ATS's Form ATS-N, Form ATS-N 
Amendments, or both on the Web site of the NMS Stock ATS? If so, why, 
and which orders should NMS Stock ATSs be required to post? If not, why 
not? Please support your arguments.
    106. Do you believe that the Commission should make public on its 
Web site the Form ATS-N of an NMS Stock ATS that was not in operation 
as of the effective date of proposed Rule 304 during the Commission's 
review period and prior to declaring the Form ATS-N effective of 
ineffective? Why or why not? Please support your arguments.
    107. Do you believe that the Commission should make public on its 
Web site a Form ATS-N that it has declared ineffective? Why or why not? 
Please support your arguments.
    108. Do you believe that the Commission should make public on its 
Web site a Form ATS-N filed by a legacy NMS Stock ATS during the 
Commission's review period and prior to its declaring the Form ATS-N 
effective or ineffective? Why or why not? Please support your 
arguments?
    109. Do you believe that the Commission should adopt the proposal 
to make public on its Web site all Form ATS-N Amendments during the 
Commission's review period and prior to its determination as to whether 
a Form ATS-N Amendment should be declared ineffective? If so, why? If 
not, why not? Please support your arguments.
    110. Do you believe that the Commission should adopt the proposal 
whereby the Commission would continue to make public on its Web site a 
Form ATS-N Amendment that it has declared ineffective? Why or why not? 
Please support your arguments.
    111. Do you believe the Commission's current practice of making 
publicly available a list of ATSs with a Form ATS on file with the 
Commission puts market participants on sufficient notice of the 
regulatory status of NMS Stock ATSs with which they may do business? 
Why or why not? Please support your arguments.
    112. Does the Commission's current practice of making publicly 
available a list of ATSs with a Form ATS on file with the Commission 
create the potential for market participants to misunderstand the 
operations of the market? If so, how? If not, why not? Please support 
your arguments.
    113. Do you believe that market participants currently have 
sufficient information regarding the activities of an NMS Stock ATS's 
broker-dealer operator and its affiliates as they relate to the ATS, 
including changes to such activities, to evaluate conflicts of interest 
that may arise out of the position that the broker-dealer occupies as 
the operating entity of the NMS Stock ATS? Why or why not? Please 
support your arguments.
    114. Do you believe the Commission's proposal to make public 
certain Form ATS-N filings would better enable market participants to 
evaluate conflicts of interest that may arise out of the position that 
the broker-dealer occupies as the operating entity of the NMS Stock 
ATS? Why or why not? Please support your arguments.
    115. Do you believe that making public Form ATS-N filings would 
place NMS Stock ATSs at a competitive disadvantage with respect to 
other trading centers, including national securities exchanges? Why or 
why not? Please support your arguments.
    116. Do you believe that making public Form ATS-N filings would 
incentivize NMS Stock ATSs to make more accurate, current, and complete 
disclosures? Why or why not? Please support your arguments.

[[Page 81037]]

    117. Do you believe the Commission should continue to make public a 
Form ATS-N or Form ATS-N Amendments where the Commission has suspended, 
revoked, or limited the NMS Stock ATS's exemption pursuant to Rule 
304(a)(4)? Why or why not? Please support your arguments.
    118. Do you believe that responding to questions on proposed Form 
ATS-N would require an NMS Stock ATS to disclose proprietary 
information that could place the NMS Stock ATS or its broker-dealer 
operator's other business activities at a competitive disadvantage? If 
so, please identify the question on the Form ATS-N and specify what 
information in response to that question would result in the disclosure 
of proprietary information and describe why the disclosure could create 
a competitive disadvantage for the NMS Stock ATS or its broker-dealer 
operator's other business activities.
    119. In light of the information that national securities 
exchanges, which compete with NMS Stock ATSs, are required to disclose 
regarding their operations, should NMS Stock ATSs continue to be 
eligible for the exemption from the definition of exchange without 
having to disclose such information? Why or why not? Please explain in 
detail.

E. Rule 304(c)(1) and (2): Proposed Form ATS-N Requirements

    Proposed Rule 304(c)(1) would require NMS Stock ATSs to respond to 
each item on Form ATS-N, as applicable, in detail and disclose 
information that is accurate, current, and complete. The Commission 
preliminarily believes that market participants would use information 
disclosed on proposed Form ATS-N to evaluate whether a particular NMS 
Stock ATS would be a desirable venue to which to route their orders. In 
addition, the Commission intends to use the information disclosed on 
the Form ATS-N to exercise oversight over and monitor developments of 
NMS Stock ATSs. Given these potential uses, the Commission 
preliminarily believes that it is important that the Form ATS-N contain 
detailed disclosures that are accurate, current, and complete.
    The Commission notes that Regulation ATS requires NMS Stock ATSs to 
be registered as broker-dealers with the Commission, which entails 
becoming a member of FINRA and fully complying with the broker-dealer 
regulatory regime. FINRA Rule 3130 requires each member to designate 
and specifically identify to FINRA one or more principals to serve as a 
chief compliance officer and each member to have its chief executive 
officer certify annually that the member has in place processes to 
establish, maintain, review, test and modify written compliance 
policies and written supervisory procedures reasonably designed to 
achieve compliance with applicable FINRA rules, MSRB rules and federal 
securities laws and regulations, and that the chief executive 
officer(s) has conducted one or more meetings with the chief compliance 
officer(s) in the preceding 12 months to discuss such processes.\350\ 
The Commission requests comment on whether the certification required 
under FINRA Rule 3130 will help ensure that the broker-dealer operator 
of the NMS Stock ATS complies with proposed Rule 304, including 
proposed Rule 304(c)(1), which would require the accurate, current, and 
complete disclosures on Form ATS-N.
---------------------------------------------------------------------------

    \350\ See FINRA Rule 3130(b). FINRA Rule 3120(c) sets forth the 
following:
    The certification shall state the following:
    The undersigned is/are the chief executive officer(s) (or 
equivalent officer(s)) of (name of member corporation/partnership/
sole proprietorship) (the ``Member''). As required by FINRA Rule 
3130(b), the undersigned make(s) the following certification:
    1. The Member has in place processes to:
    (A) establish, maintain and review policies and procedures 
reasonably designed to achieve compliance with applicable FINRA 
rules, MSRB rules and federal securities laws and regulations;
    (B) modify such policies and procedures as business, regulatory 
and legislative changes and events dictate; and
    (C) test the effectiveness of such policies and procedures on a 
periodic basis, the timing and extent of which is reasonably 
designed to ensure continuing compliance with FINRA rules, MSRB 
rules and federal securities laws and regulations.
    2. The undersigned chief executive officer(s) (or equivalent 
officer(s)) has/have conducted one or more meetings with the chief 
compliance officer(s) in the preceding 12 months, the subject of 
which satisfy the obligations set forth in FINRA Rule 3130.
    3. The Member's processes, with respect to paragraph 1 above, 
are evidenced in a report reviewed by the chief executive officer(s) 
(or equivalent officer(s)), chief compliance officer(s), and such 
other officers as the Member may deem necessary to make this 
certification. The final report has been submitted to the Member's 
board of directors and audit committee or will be submitted to the 
Member's board of directors and audit committee (or equivalent 
bodies) at the earlier of their next scheduled meetings or within 45 
days of the date of execution of this certification.
    4. The undersigned chief executive officer(s) (or equivalent 
officer(s)) has/have consulted with the chief compliance officer(s) 
and other officers as applicable (referenced in paragraph 3 above) 
and such other employees, outside consultants, lawyers and 
accountants, to the extent deemed appropriate, in order to attest to 
the statements made in this certification.
---------------------------------------------------------------------------

Request for Comment
    120. Do you believe that the certification required under FINRA 
Rule 3130 will help ensure an NMS Stock ATS's compliance with proposed 
Rule 304, including the requirement that disclosures on Form ATS-N are 
accurate, current, and complete? Why or why not? Please support your 
arguments.
    Proposed Rule 304(c)(2) would provide that any report required to 
be filed with the Commission under proposed Rule 304 of Regulation ATS 
must be filed electronically on Form ATS-N, and include all information 
as prescribed in proposed Form ATS-N and the instructions thereto. The 
Commission's proposal contemplates the use of the electronic form 
filing system (``EFFS'') to file a completed Form ATS-N. Based on the 
widespread use and availability of the Internet, the Commission 
preliminarily believes that filing Form ATS-N in an electronic format 
would be less burdensome and a more efficient filing process for NMS 
Stock ATSs and the Commission, as it is likely to be less expensive and 
cumbersome than mailing paper forms to the Commission. The proposed 
Form ATS-N would require an electronic signature to help ensure the 
authenticity of the filing. The Commission preliminarily believes these 
proposed requirements would expedite communications between the 
Commission and its staff and the broker-dealer operator concerning the 
NMS Stock ATS and help to ensure that only personnel authorized by the 
NMS Stock ATS are filing required materials. This proposed requirement 
is intended to provide a uniform manner in which the Commission would 
receive--and the broker-dealer operator would file--the Form ATS-N made 
pursuant to proposed Rule 304 of Regulation ATS. Also, NMS Stock ATSs 
would be able to review how other filers that were allowed to become 
effective responded to the same questions on Form ATS-N for guidance on 
how to respond. Additionally, the consistent framework would make it 
easier and more efficient for the Commission and market participants 
reviewing the disclosures to promptly review, analyze, and respond, as 
necessary, to the information proposed to be provided.\351\
---------------------------------------------------------------------------

    \351\ This proposed requirement is consistent with electronic-
reporting standards set forth in Form SCI. See SCI Adopting Release, 
supra note 17, at 72357 (discussing electronic filing requirements 
of Form SCI).
---------------------------------------------------------------------------

    Further, the Commission also is proposing that documents filed 
through the EFFS system must be in a text-searchable format without the 
use of optical character recognition. The Commission believes that 
proposing to require documents to be filed in a text-searchable format 
would allow the Commission and its staff and market

[[Page 81038]]

participants to efficiently review and analyze information provided on 
proposed Form ATS-N. In particular, a text-searchable format would 
allow the Commission and its staff to better gather, analyze, and use 
data filed as exhibits, whereas a non-text-searchable format filing 
would require significantly more steps and labor to review and analyze 
data.
    The Commission is proposing that proposed Form ATS-N be filed with 
the Commission in a structured format. The Commission preliminarily 
believes that proposing Form ATS-N to be filed with the Commission in a 
structured format could allow the Commission and market participants to 
better search and analyze information about NMS Stock ATSs. The 
Commission is proposing that Parts I (Name) and II (Broker-Dealer 
Operator Registration and Contact Information) of proposed Form ATS-N 
would be provided as fillable forms on the Commission's EFFS system. 
The Commission is proposing that Part III (Activities of the Broker-
Dealer Operator and Affiliates) of proposed Form ATS-N would be filed 
in a structured format whereby the filer would provide checkbox 
responses to certain questions and narrative responses that are block-
text tagged by Item. The Commission is proposing that Part IV (The NMS 
Stock ATS Manner of Operations) of proposed Form ATS-N would also be 
filed in a structured format in that the filer would block-text tag 
narrative responses by Item. The Commission is proposing that Part V 
(Contact Information, Signature Block, and Consent to Service) of 
proposed Form ATS-N would be provided as fillable forms on the 
Commission's EFFS system.
    The Commission notes that there are a variety of methods by which 
information can be collected and structured for review and analysis. 
For example, some or all of the information provided on Form ATS-N 
could be structured according to a particular standard that already 
exists, or a new taxonomy that the Commission creates, or as a single 
machine-readable PDF. Given the Commission's proposal that information 
on Form ATS-N be filed in a structured format, the Commission seeks 
comment on the manner in which proposed Form ATS-N could be structured 
to better enable the Commission and market participants to collect and 
analyze the data.
Request for Comment
    121. Do you believe that the electronic filing requirement of 
proposed Rule 304(c)(2) is appropriate? Do you believe that the 
electronic filing of Form ATS-N would be less burdensome and/or a more 
efficient filing process for NMS Stock ATSs compared to delivering the 
Form ATS-N by mail on paper? Alternatively, would the submission of 
proposed Form ATS-N via electronic mail to one or more Commission email 
addresses be a more appropriate way for NMS Stock ATSs to file Form 
ATS-N with the Commission? Are there other alternative methods that 
would be preferable? If so, please describe. Is the proposal to require 
an electronic signature appropriate? If not, why not? Please support 
your arguments.
    122. Should the Commission adopt the proposal that proposed Form 
ATS-N should be filed with the Commission in a structured format? Why 
or why not? If so, what standards of structuring should be used for 
information to be provided on proposed Form ATS-N? Please explain. If 
not, what format should proposed Form ATS-N take? Please identify the 
format and explain.
    123. Are there any specific aspects of proposed Form ATS-N that 
should or should not be provided in a structured format? Please 
identify those aspects of proposed Form ATS-N that should or should not 
be provided in a structured format and explain why those aspects of the 
form should or should not be structured.
    124. Should the Commission adopt the proposal to require documents 
to be filed in a text-searchable format on proposed Form ATS-N? Why or 
why not? Please support your arguments.

V. Proposed Form ATS-N: Submission Type and Part I of Form ATS-N

    Proposed Form ATS-N would require that an entity identify the type 
of filing by marking the appropriate checkbox. The Form ATS-N filing 
may either be a Form ATS-N, a Form ATS-N Amendment, or a notice of 
cessation. In addition, proposed Form ATS-N would require the NMS Stock 
ATS to indicate whether a Form ATS-N Amendment is being submitted as a 
material amendment, periodic amendment, or correcting amendment. The 
Commission is also proposing that, for an Form ATS-N Amendment, the NMS 
Stock ATS provide a brief narrative description of the amendment so 
market participants can quickly understand the nature of the Form ATS-N 
Amendment.\352\ For notices of cessation, proposed Form ATS-N would 
require the date that the NMS Stock ATS will cease to operate. A Form 
ATS-N filer may also withdraw a previously filed Form ATS-N.\353\
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    \352\ For a Form ATS-N Amendment, the NMS Stock ATS would also 
be required to attach as Exhibit 3A and/or Exhibit 4A a redline(s), 
showing changes to Part III and/or Part IV of proposed Form ATS-N, 
respectively, in order to point out the amendment(s) to its prior 
Form ATS-N filing. The Commission preliminarily believes that 
requiring NMS Stock ATSs to attach redlines to their Form ATS-N 
Amendments would better enable market participants and the 
Commission to review Form ATS-N Amendments in a more efficient 
manner.
    \353\ Instruction B to proposed Form ATS-N would provide that if 
an NMS Stock ATS determines to withdraw a Form ATS-N, it must select 
the appropriate checkbox and provide the correct file number to 
withdraw the submission.
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    Part I of proposed Form ATS-N would require the name of the broker-
dealer operator and the NMS Stock ATS. Rule 301(b)(1) requires that an 
ATS, including an NMS Stock ATS, register as a broker-dealer under 
Section 15 of the Exchange Act.\354\ Today, while some broker-dealers 
are registered with the Commission for the sole purpose of operating as 
an ATS, most broker-dealer operators of ATSs engage in brokerage and/or 
dealing activities in addition to operating an NMS Stock ATS. In some 
cases, broker-dealers operate multiple NMS Stock ATSs.\355\ To identify 
the registered broker-dealer for an NMS Stock ATS and to assist the 
Commission in collecting and organizing its filings, proposed Form ATS-
N would require the name of the registered broker-dealer for the NMS 
Stock ATS (i.e., the broker-dealer operator), as it is stated on Form 
BD, in Part I, Item 1 of proposed Form ATS-N. The name of the 
registered broker-dealer for the NMS Stock ATS would also assist the 
Commission in ensuring that the NMS Stock ATS has appropriately 
registered as a broker-dealer as part of its exemption from exchange 
registration under Exchange Act Rule 3a1-1(a)(2). To the extent that a 
``DBA'' (doing business as) is used to identify the NMS Stock ATS to 
the public or the Commission, or if a registered broker-dealer operates 
multiple NMS Stock ATSs, proposed Form ATS-N would require the full 
name of the NMS Stock ATS under which business is conducted, if any, in 
Part I, Item 2 of proposed Form ATS-N. Part I, Item 3 of proposed Form 
ATS-N would require the NMS Stock ATS to provide its Market Participant 
Identifier (``MPID'') for the NMS Stock ATS.\356\ The Commission 
preliminarily

[[Page 81039]]

believes that providing the name of the NMS Stock ATS or DBA and its 
MPID would provide clarity to the public and Commission about the 
identity under which the business of the NMS Stock ATS is conducted. 
Proposed Form ATS-N would also require an ATS to identify whether it is 
currently operating pursuant to a previously filed initial operation 
report on Form ATS.
---------------------------------------------------------------------------

    \354\ 17 CFR 242.301(b)(1); 15 U.S.C. 78o.
    \355\ A broker-dealer operator would be required to file a 
separate Form ATS-N for each NMS Stock ATS operated by the broker-
dealer. See Instruction A of proposed Form ATS-N.
    \356\ An MPID, or other mechanism or mnemonic, is used to 
identify a market participant for the purposes of electronically 
accessing a national securities exchange or an ATS. See, e.g., 
Securities Exchange Act Release No. 63241 (November 3, 2010), 75 FR 
69792 (November 15, 2010). ATSs are required to use a unique MPID 
for the ATS when reporting trade information to FINRA. See FINRA ATS 
Reporting Approval, supra note 122.
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Request for Comment
    125. Do you believe that Part I of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required? If not, how should Part I of proposed Form ATS-N be revised 
to provide additional clarity? Please explain in detail and support 
your arguments.
    126. Do you believe there is other information that market 
participants might find relevant or useful with regard to the 
disclosures in Part I? If so, describe such information and explain 
whether, and if so why, such information should be required to be 
provided under proposed Form ATS-N. Please support your arguments.
    127. Do you believe that the broker-dealer operator should be 
required to identify the type of Form ATS-N filing (i.e., Form ATS-N, 
Form ATS-N Amendment, notice of cessation, or withdrawal) by marking 
the appropriate checkbox, and for notices of cessation, provide the 
date that the NMS Stock ATS will cease to operate? Why or why not? 
Please support your arguments.
    128. Do you believe that the broker-dealer operator should be 
required to provide a brief summary of a Form ATS-N Amendment? Why or 
why not? Please support your arguments.
    129. Do you believe that a broker-dealer operator should be allowed 
to withdraw a previously filed Form ATS-N? Why or why not? Please 
support your arguments. If so, when should a broker-dealer operator be 
permitted to withdraw a previously filed Form ATS-N? Please explain.
    130. Do you believe that the broker-dealer operator should be 
required to disclose the date on which it commenced, or intends to 
commence, operation of the NMS Stock ATS in Part I of Form ATS-N? Why 
or why not? Please support your arguments.
    131. Do you believe that the Commission should require the MPID of 
the NMS Stock ATS as a required disclosure on proposed Form ATS-N? Why 
or why not? Please support your arguments.
    132. What are the potential costs and benefits of disclosing the 
information required by Part I of proposed Form ATS-N? Would the 
proposed disclosures in Part I of proposed Form ATS-N require an NMS 
Stock ATS to reveal too much (or not enough) information? Why or why 
not? Please support your arguments.

VI. Part II of Proposed Form ATS-N: Broker-Dealer Operator Registration 
Information

    Part II of proposed Form ATS-N would require certain general 
information regarding the broker-dealer operator and the NMS Stock ATS. 
With respect to the broker-dealer operator, Part II of proposed Form 
ATS-N would require registration information including: its SEC File 
Number, Central Registration Depository (``CRD'') Number, effective 
date of the broker-dealer operator's registration with the Commission, 
the name of the national securities association with which it is a 
member, and the effective date of broker-dealer operator's membership 
with the national securities association (e.g., FINRA). The Commission 
proposes to require this information to assess whether the NMS Stock 
ATS has complied with the requirement to register as a broker-dealer 
pursuant to Rule 301(b)(1) of Regulation ATS. This information also 
would expedite the Commission's communications with the broker-dealer 
operator's self-regulatory organization as needed.
    Additionally, Part II of proposed Form ATS-N would require certain 
information regarding the legal status of the broker-dealer operator. 
Specifically, proposed Form ATS-N would require that the broker-dealer 
operator provide its legal status (e.g., corporation, partnership, sole 
proprietorship) and except in the case of a sole proprietorship, the 
date of formation and state or country in which it is formed. The 
Commission is proposing to require the information related to the 
broker-dealer operator's legal status to help ensure that the broker-
dealer operator has appropriately filed as a legal entity (except in 
the case of sole proprietorships).
    Proposed Form ATS-N would also require the address of the physical 
location of the NMS Stock ATS matching system and, if it is different 
from the physical location, the mailing address of the NMS Stock ATS. 
If the broker-dealer operator is a sole proprietorship and an address 
of the NMS Stock ATS is a private residence, the Commission would not 
make that information available on the Commission's Web site due to 
concerns about the confidentiality of personally identifiable 
information. Furthermore, Part II would require the NMS Stock ATS to 
provide a URL address for the Web site of the NMS Stock ATS, and in the 
signature block in Part V of proposed Form ATS-N, the representative of 
the broker-dealer operator would also be required to provide his or her 
business contact information, including the person's name and title, 
telephone number, and email address.\357\ This information would 
facilitate communication with the broker-dealer operator and the NMS 
Stock ATS during the Commission's review of a Form ATS-N and later as 
necessary as part of the Commission's ongoing monitoring of the NMS 
Stock ATS. To the extent the broker-dealer operator's contact 
information that is provided in Part II is made publicly available, 
that information would also facilitate communication between 
subscribers and the broker-dealer operator.
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    \357\ The Commission would also keep the contact information of 
the broker-dealer operator's representative confidential, subject to 
applicable law.
     Consistent with the requirements of proposed Form ATS-N, the 
signature block in Part V would also require the NMS Stock ATS to 
consent that service of any civil action brought by, or notice of 
any proceeding before, the Commission or a SRO in connection with 
the ATS's activities may be given by registered or certified mail or 
email to the contact employee at the primary street address or email 
address, or mailing address if different, given in Part I. The 
signatory would further represent that the information and 
statements contained on the submitted Form ATS-N, including 
exhibits, schedules, attached documents, and any other information 
filed, are current, true, and complete.
---------------------------------------------------------------------------

    Part II of proposed Form ATS-N would also require an NMS Stock ATS 
to attach, as Exhibit 1, a copy of any materials currently provided to 
subscribers or other persons, related to the operations of the NMS 
Stock ATS or the disclosures on Form ATS-N.\358\ The Commission 
understands that some ATSs may provide to subscribers, or other 
persons, marketing material or other material containing important 
information about the ATS's operations in FIX protocol procedures, 
rules of engagement/user manuals, or frequently asked questions. These 
documents may include information regarding, among other things, the 
order matching procedures, priority rules, order types, and order entry 
and execution procedures of the ATS, and in some instances, such 
documents may contain important information about an NMS Stock ATS that 
may not be specified in the required disclosures under proposed Form 
ATS-N. The Commission notes that the purpose of proposed Form

[[Page 81040]]

ATS-N is to provide operational transparency with regard to the NMS 
Stock ATS. To the extent that the NMS Stock ATS discloses information 
on standardized materials provided to certain subscribers, whether an 
individual or on group basis, the Commission preliminarily believes the 
NMS Stock ATS should make this information available to all 
subscribers, and therefore the Commission is proposing to require these 
materials be filed as an attachment to Exhibit 1 to proposed Form ATS-
N. The Commission further notes that this requirement is similar to the 
requirement of subpart (f) of Exhibit F on existing Form ATS.\359\
---------------------------------------------------------------------------

    \358\ For currently operating NMS Stock ATSs that file a Form 
ATS-N, each ATS would only be required to provide the materials it 
currently provides to subscribers or other persons and would not be 
required to attach materials provided to subscribers or other person 
in the past.
    \359\ Subpart (f) of Form ATS requires a copy of the ATS's 
subscriber manual and any other materials provided to subscribers.
---------------------------------------------------------------------------

    Proposed Form ATS-N also would require that the broker-dealer 
operator attach, as Exhibits 2A and 2B (or provide a link to the 
relevant URL address where the required documents can be found), a copy 
of the most recently filed Schedule A of the broker-dealer operator's 
Form BD disclosing information related to direct owners and executive 
officers, and a copy of the most recently filed Schedule B of the 
broker-dealer operator's Form BD disclosing information related to 
indirect owners, respectively. The proposed Form ATS-N would require 
information from the broker-dealer operator's Schedule A and Schedule B 
of Form BD to help market participants understand the persons and 
entities that directly and indirectly own the broker-dealer operator. 
The Commission is requiring that NMS Stock ATSs provide names of the 
direct and indirect owners of the broker-dealer operator on Form ATS-N, 
even though the same information is provided on Form BD, because 
information about the ownership of the broker-dealer operator will 
enable market participants to understand better any potential conflicts 
of interest that may arise therefrom, which is one of the central 
purposes of proposed Form ATS-N. Also, providing this information on 
Form ATS-N would facilitate the Commission's, as well as market 
participants', analysis of the ownership and any potential for 
conflicts arising therefrom by providing this information all on one 
form. Moreover, the Commission preliminarily believes it is appropriate 
for NMS Stock ATSs to provide this information using a URL address for 
these documents in lieu of attaching the actual documents to their Form 
ATS-N filings.
Request for Comment
    133. Do you believe that Part II of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required? If not, how should Part II of proposed Form ATS-N be revised 
to provide additional clarity? Please explain in detail.
    134. Do you believe there is other information that market 
participants might find relevant or useful with regard to the 
disclosures in Part II? If so, describe such information and explain 
whether, and if so why, such information should be required to be 
provided under proposed Form ATS-N. Please support your arguments.
    135. Do you believe that the Commission should require the 
effective date of broker-dealer registration with the Commission as a 
required disclosure on proposed Form ATS-N? Why or why not? Please 
support your arguments.
    136. Do you believe that the Commission should require the SEC File 
number of the broker-dealer operator as a required disclosure on 
proposed Form ATS-N? Why or why not? Please support your arguments.
    137. Do you believe that the Commission should require the CRD 
number of the broker-dealer operator as a required disclosure on 
proposed Form ATS-N? Why or why not? Please support your arguments.
    138. Do you believe that the Commission should require the address 
of the physical location of the NMS Stock ATS's matching system as a 
required disclosure on proposed Form ATS-N? Why or why not? Please 
support your arguments.
    139. Do you believe that the Commission should require the mailing 
address of the NMS Stock ATS as a required disclosure on proposed Form 
ATS-N? Why or why not? Please support your arguments.
    140. Do you believe that the Commission should require the Web site 
URL of the NMS Stock ATS as a required disclosure on proposed Form ATS-
N? Why or why not? Please support your arguments.
    141. Do you believe that the Commission should require NMS Stock 
ATSs to disclose materials provided to subscribers or other persons 
related to the operations of the NMS Stock ATS on proposed Form ATS-N? 
Why or why not? Please support your arguments. Do you believe such 
materials should be provided to the Commission as an Exhibit? Why or 
why not? Please support your arguments. Do you believe that the NMS 
Stock ATS should be able to provide a URL where these documents can be 
found in lieu of providing the documents as an Exhibit? Why or why not? 
Please support your arguments.
    142. Do you believe it is appropriate for the Commission to not 
make public the address of the NMS Stock ATS that is a sole 
proprietorship? Why or why not? Please support your arguments.
    143. Do you believe it is appropriate for the Commission to not 
make public the contact information of the broker-dealer operator's 
representative? Why or why not? Please support your arguments.
    144. Do you believe that there is any information, that would be 
required to be disclosed in Part II of proposed Form ATS-N that the 
Commission should not require to be disclosed due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    145. What are the potential costs and benefits of disclosing the 
information required by Part II of proposed Form ATS-N? Would the 
proposed disclosures in Part II of proposed Form ATS-N require an NMS 
Stock ATS to reveal too much (or not enough) information? Why or why 
not? Please support your arguments.
    146. Do you believe there are there certain types of materials 
provided to subscribers that would be responsive to Exhibit 1 that 
should or should not be disclosed on Form ATS-N? If so, what types of 
materials and why? Do you believe an NMS Stock ATS should provide in 
response to Exhibit 1 the materials the NMS Stock ATS provides to 
subscribers such as FIX protocol procedures, rules of engagement/user 
manuals, frequently asked questions, or marketing materials? Why or why 
not? Please support your arguments.
    147. Do you believe the Commission should require NMS Stock ATSs to 
provide on Form ATS-N information on Exhibits 2A and 2B, in light of 
the fact that the information is already provided on Form BD?
    148. Do you believe the Commission should require the NMS Stock ATS 
to provide disclosure about its governance structure and compliance 
programs and controls to comply with Regulation ATS? Why or why not? If 
so, what aspects of the NMS Stock ATSs' governance structure and 
compliance programs and controls to comply with Regulation ATS should 
the NMS Stock ATS be required to disclose? Please support your 
arguments.

[[Page 81041]]

VII. Part III of Proposed Form ATS-N: Activities of the Broker-Dealer 
Operator and Its Affiliates

A. The Relationship Between the Broker-Dealer Operator's Operation of 
the NMS Stock ATS and Its Other Operations

1. Background
    The Commission preliminarily believes 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. As previously noted, Rule 301(b)(1) of 
Regulation ATS requires that an ATS, including an NMS Stock ATS, 
register as broker-dealer under Section 15 of the Exchange Act (the 
``broker dealer operator'').\360\ The broker-dealer operator of the ATS 
trading platform is legally responsible for all operational aspects of 
the ATS and for ensuring that the ATS operates in compliance with 
applicable federal securities laws and the rules and regulations 
thereunder, including Regulation ATS. The broker-dealer operator, and 
in some cases, its affiliates,\361\ controls access to the ATS and 
provides the technology and systems that support the trading on the 
ATS.\362\ Based on Commission experience, the broker-dealer operator, 
or in some cases, its affiliates, directs the personnel that service 
the ATS or otherwise manages service providers that may perform certain 
functions of the ATS. The broker-dealer operator, or in some cases, its 
affiliates, also determines, among other things: (1) What securities 
will trade on the ATS; (2) who may become subscribers that will 
participate on the ATS; (3) whether there will be segmented categories 
of order flow in the ATS, and if so, how the order flow will be 
segmented; (4) order matching methodologies and priority rules; (5) the 
rules governing the interaction and execution of orders; and (6) the 
display, if any, of orders and trading interest. Additionally, the 
broker-dealer operator, or in some cases, its affiliates, determines 
the means by which orders are entered on and subscribers access 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. The broker-dealer operator, or in some cases, its 
affiliates, also controls the market data that the ATS uses to 
prioritize, match, and execute orders and the transmission of and 
access to confidential order and execution information sent to and from 
the ATS.\363\ Based on Commission experience, the operations of the NMS 
Stock ATS and the other operations of the broker-dealer operator are 
usually closely intertwined as the broker-dealer operator generally 
leverages its information technology, systems, personnel, and market 
data, and those of its affiliates, to operate the ATS.
---------------------------------------------------------------------------

    \360\ 17 CFR 242.301(b)(1); 15 U.S.C. 78o. Additionally, as a 
registered entity with the Commission, a broker-dealer operating an 
ATS is subject to applicable federal securities laws, as well as 
other requirements, including the rules of any SRO of which it is a 
member.
    \361\ The Commission is proposing to define ``affiliate'' for 
purposes of Form ATS-N as described and discussed further below. See 
infra note 378 and accompanying text. See also Instruction G of 
proposed Form ATS-N.
    \362\ 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.
    \363\ 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.
---------------------------------------------------------------------------

    The Commission is also aware that most ATSs that currently transact 
in NMS stocks are operated by broker-dealers that engage in significant 
brokerage and dealing activities in addition to their operation of an 
ATS(s).\364\ These multi-service broker-dealers may offer their 
customers a variety of brokerage services, often with or through their 
affiliates, including algorithmic trading strategy software, agency 
sales desk support, and automated smart order routing services. Multi-
service broker-dealers that also operate an NMS Stock ATS may use the 
ATS as a complement to the broker-dealer's other service lines and may 
use the ATS as an opportunity to execute orders ``in house'' before 
seeking contra-side interest at other execution venues. For instance, a 
broker-dealer operator, or its affiliate, may operate, among other 
things, an OTC market making desk or proprietary trading desks in 
addition to operating an NMS Stock ATS.\365\ A multi-service broker-
dealer may also execute orders in NMS stocks internally (and not within 
its respective NMS Stock ATS(s)) 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(s) or another external 
trading center.\366\ Consequently, non-ATS trading centers operated by 
the broker-dealer operator of an ATS (i.e., internal executions by the 
broker-dealer outside of an ATS), or its affiliates, often compete with 
the ATS as a trading venue for the execution of transactions in NMS 
stocks.
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    \364\ The Commission notes that, based on Form BD disclosures 
from June of 2015, all but 7 of the 36 broker-dealer operators whose 
ATSs trade NMS stocks disclose business activities other than 
operating an ATS. The other business activities disclosed by broker-
dealer operators (and the number of such broker-dealer operators 
providing such disclosure) include: Retailing corporate equity 
securities over-the-counter (22); put and call broker or dealer or 
option writer (18); exchange commission business other than floor 
activities (18); private placements of securities (17); selling 
corporate debt securities (17); government securities broker (15); 
trading securities for own account (15); municipal securities broker 
(13); exchange member engaged in floor activities (13); non-exchange 
member arranging for transactions in listed securities by exchange 
member (12); underwriter or selling group participant (corporate 
securities other than mutual funds) (13); selling interests in 
mortgages or other receivables (12); making inter-dealer markets in 
corporate securities over-the-counter (11); government securities 
dealer (11); municipal securities dealer (11); solicitor of time 
deposits in a financial institution (7); investment advisory 
services (7). This data does not include the business activities of 
affiliates of the broker-dealer operators. Of the 10 ATSs that 
traded the most NMS stock measured by total shares executed during 
the second quarter of 2015, 6 disclose on Form BD that they engage 
in proprietary trading and making inter-dealer markets in corporate 
securities OTC, and 7 disclose retailing corporate equities OTC. See 
FINRA's ATS Transparency Data Quarterly Statistics, 2nd Quarter of 
2015, http://www.finra.org/industry/ats/ats-transparency-data-quarterly-statistics.
    \365\ These non-ATS, OTC activities in NMS stocks may include 
operating as an OTC market maker, block positioner, or operating an 
internal broker-dealer system. See 2010 Equity Market Structure 
Release, supra note 124 at 3599-3600. See also infra note 387 and 
accompanying text. Additionally, an affiliate of the broker-dealer 
operator of an NMS Stock ATS may also operate non-ATS trading 
centers.
    \366\ 17 CFR 242.600(b)(78).
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2. Potential Conflicts of Interest for the Broker-Dealer Operator or 
Its Affiliates
    Due to the frequent overlap between the operations of the broker-
dealer operator or its affiliates outlined above and the operations of 
ATSs that trade NMS stocks, the Commission preliminarily believes that 
the interests of the broker-dealer operator or its affiliates sometimes 
compete with the interests of an ATS's subscribers, or customers of the 
ATS's subscribers, for executions on the ATS. Accordingly, the 
Commission preliminarily believes that these competing interests, at 
times, may give rise to potential conflicts of interest for broker-
dealer operators of NMS Stock ATSs or their affiliates. Furthermore, 
the Commission preliminarily believes that the frequent overlap between 
the operation of ATSs that trade NMS stocks and the other operations of 
broker-dealer operators or their affiliates gives rise to the potential 
for information leakage of subscribers' confidential trading 
information to other

[[Page 81042]]

business units of the broker-dealer operator or its affiliates.\367\
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    \367\ 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 
7, at 70879.
---------------------------------------------------------------------------

    When evaluating an NMS Stock ATS as a possible trading venue, a 
market participant would likely want to know about the various 
activities in which a broker-dealer operator and its affiliates engage 
that may give rise to conflicts of interests. For example, as noted 
above, the broker-dealer operator of an NMS Stock ATS may operate 
multiple trading centers, which operate as competing trading venues for 
the execution of trades in NMS stocks. Many broker-dealer operators or 
their affiliates trade proprietarily on the NMS Stock ATS. If a broker-
dealer operator that operates an NMS Stock ATS is also able to trade on 
that NMS Stock ATS, there may be an incentive for the broker-dealer 
operator to operate its NMS Stock ATS in a manner that favors the 
trading activity of the broker-dealer operator's business units or 
affiliates. A broker-dealer operator of an NMS Stock ATS may provide 
its other business units or affiliates, who may be subscribers to the 
NMS Stock ATS, with access to certain services of the NMS Stock ATS 
that are not provided to other subscribers, which may result in trading 
advantages to those business units or affiliates.\368\ The Commission 
preliminarily believes that market participants that subscribe and 
route orders to NMS Stock ATSs would want to know how a broker-dealer 
operator of an NMS Stock ATS treats subscriber orders versus orders of 
its business units or its affiliates. The Commission preliminarily 
believes that customers of the broker-dealer operator, who may also be 
subscribers to the NMS Stock ATS, would also want to better understand 
the circumstances in which the broker-dealer operator may send their 
orders to its NMS Stock ATS, internalize their orders outside of the 
NMS Stock ATS, or route to another trading venue.
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    \368\ Such benefits or other advantages could include the NMS 
Stock ATS providing itself or its affiliates with faster access to 
the NMS Stock ATS or priority in executions over other subscribers. 
Unlike registered national securities exchanges, ATSs are not 
required to have rules that are designed not to permit unfair 
discrimination; however, the advantages that a broker-dealer 
operator may provide to itself or its affiliates may not be fully 
disclosed to subscribers to an ATS.
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    Concerns regarding potential conflicts of interests involving 
trading venues that execute securities transactions are not novel.\369\ 
In the context of national securities exchanges, the Commission has 
expressed concern that the affiliation of a registered national 
securities exchange with one of its members raises potential conflicts 
of interest, and the potential for unfair competitive advantage.\370\ 
Because the Commission reviews the rules of registered national 
securities exchanges, a process which requires, among other things, 
that to approve certain rule changes the Commission find that the 
exchange's proposed rule changes are consistent with the Exchange 
Act,\371\ 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.\372\
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    \369\ See, e.g., Securities Exchange Act Release Nos. 50700, 69 
FR 71256, 71257 (December 8, 2004) (discussing the inherent 
conflicts of interest between a self-regulatory organization's 
regulatory obligations and the interests of its members, its market 
operations, its listed issuers, and, in the case of a demutualized 
SRO, its shareholders); 50699, 69 FR 71126 (December 8, 2004) 
(proposing rules that the Commission believed would help insulate 
the regulatory activities of an exchange or national securities 
association from the conflicts of interest that otherwise may arise 
by virtue of its market operations); 63107, 75 FR 65882 (October 26, 
2010) (proposing Regulation MC under the Exchange Act to mitigate 
conflicts of interest regarding ownership interests and voting 
rights with respect to security-based swap clearing agencies, 
security-based swap execution facilities, and security-based swap 
exchanges pursuant to the Dodd Frank Act, Pub. L. 111-203, Section 
765).
    \370\ See, e.g., Securities Exchange Act Release Nos. 66808 
(April 13, 2012) 77 FR 23294 (April 18, 2012) (SR-BATS-2012-013) 
(order approving a proposed rule change by BATS Exchange, Inc. 
(``BATS Exchange'') relating to its ability to receive inbound 
routes of equities orders through BATS Trading, Inc., BATS 
Exchange's routing broker-dealer, from BATS-Y Exchange, Inc.) at 
23295 n.16 and accompanying text; 59281 (January 22, 2009), 74 FR 
5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a joint 
venture between NYSE and BIDS Holdings L.P.) (``NYSE/BIDS Order''); 
54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-
006) (order approving Nasdaq's proposal to adopt Nasdaq Rule 2140, 
restricting affiliations between Nasdaq and its members) (``Nasdaq 
Affiliation Order''); and 53382 (February 27, 2006), 71 FR 11251 
(March 6, 2006) (SR-NYSE-2005-77) (order approving the combination 
of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.) 
(``NYSE/Arca Order'').
    \371\ See 15 U.S.C. 78s(b).
    \372\ For example, registered national securities exchanges have 
rules that prevent the national securities exchange from being 
affiliated with a member of the exchange, or with an affiliate of a 
member of the exchange, absent Commission approval. See, e.g., NYSE 
Rule 2B, which provides, in part, that: ``Without prior SEC 
approval, the [New York Stock Exchange LLC (``NYSE'')] or any entity 
with which it is affiliated shall not, directly or indirectly, 
acquire or maintain an ownership interest in a member organization. 
In addition, a member organization shall not be or become an 
affiliate of the [NYSE], or an affiliate of any affiliate of the 
[NYSE] . . . .'' See also Nasdaq Rule 2160, and BZX Rule 2.10. In 
cases where the Commission has approved exceptions to this 
prohibition, there have been limitations and conditions on the 
activities of the exchange and its affiliated member designed to 
address concerns about potential conflicts of interest and unfair 
competitive advantage. See, e.g., Securities Exchange Act Release 
No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 
10-182) (In the Matter of the Application of BATS Exchange, Inc. for 
Registration as a National Securities Exchange; Findings, Opinion, 
and Order of the Commission), at 49502 n.90-94 and accompanying text 
(approving the affiliation between BATS Exchange and its affiliated 
member BATS Trading in connection with the provision of routing 
services by BATS Trading for BATS Exchange and subject to certain 
limitations and conditions).
---------------------------------------------------------------------------

    In the context of a national securities exchange's affiliation with 
one of its members, the Commission's concerns stem from, among other 
things, the potential for unfair competitive advantages that the 
affiliated member could have by virtue of informational or operational 
advantages or the ability to receive preferential treatment.\373\ These 
same concerns are present in the context of trading by the broker-
dealer operator, or its affiliates, on the ATS that the broker-dealer 
operator operates. For example, the potential exists for the broker-
dealer operator of an NMS Stock ATS to place its commercial interests, 
or those of its affiliates, before those of subscribers that route 
orders to the NMS Stock ATS directly or indirectly through the broker-
dealer operator of the NMS Stock ATS or its affiliates. Some of the 
settled enforcement actions against ATSs that trade NMS stocks 
highlight this potential.\374\ Therefore, as

[[Page 81043]]

explained further below, the Commission proposes to require NMS Stock 
ATSs to disclose information about certain aspects of the activities of 
the NMS Stock ATS's broker-dealer operator, and its affiliates, in 
connection with the NMS Stock ATS, to help market participants assess 
potential conflicts of interest that may adversely impact their trading 
on the NMS Stock ATS.
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    \373\ See, e.g., Nasdaq Affiliation Order, supra note 370, at 
42151. The Commission's concern with respect to a national 
securities exchange's affiliation with one of its members also 
stemmed from the possible conflicts of interest that could arise 
between a national securities exchange's self-regulatory obligations 
and its commercial interest. See id. Because ATSs are not SROs, and 
therefore do not have self-regulatory obligations, this particular 
concern is not present in the context of ATSs.
    \374\ See, e.g., In the Matter of ITG Inc. and Alternet 
Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12, 
2015), https://www.sec.gov/litigation/admin/2015/33-9887.pdf (order 
instituting administrative and cease-and-desist proceedings, making 
findings, and imposing remedial sanctions and a cease-and-desist 
order) (``ITG Settlement''); In the Matter of UBS Securities LLC, 
Securities Exchange Act Release No. 74060 (Jan. 15, 2015), http://www.sec.gov/litigation/admin/2015/33-9697.pdf (order instituting 
administrative and cease-and-desist proceedings, making findings, 
and imposing remedial sanctions and a cease-and-desist order) (``UBS 
Settlement''); In the Matter of Lavaflow, Inc., Securities Exchange 
Act Release No. 72673 (Jul. 25, 2014), http://www.sec.gov/litigation/admin/2014/34-72673.pdf (order instituting administrative 
and cease-and-desist proceedings, making findings, and imposing 
remedial sanctions and a cease-and-desist order) (``LavaFlow 
Settlement''); In the Matter of Liquidnet, Inc., Securities Exchange 
Act Release No. 72339 (Jun. 6, 2014), http://www.sec.gov/litigation/admin/2014/33-9596.pdf (order instituting administrative and cease-
and-desist proceedings, making findings, and imposing remedial 
sanctions and a cease-and-desist order) (``Liquidnet Settlement''); 
In the Matter of eBX, LLC, Securities Exchange Act Release No. 67969 
(Oct. 3, 2012), http://www.sec.gov/litigation/admin/2012/34-67969.pdf (order instituting administrative and cease-and-desist 
proceedings, making findings, and imposing remedial sanctions and a 
cease-and-desist order) (``LeveL Settlement''); In the Matter of 
Pipeline Trading Systems LLC, Fred J. Federspiel, and Alfred R. 
Berkeley III, Securities Exchange Act Release No. 9271 (Oct. 24, 
2011) (order instituting administrative and cease-and-desist 
proceedings, making findings, and imposing remedial sanctions and a 
cease-and-desist order), https://www.sec.gov/litigation/admin/2011/33-9271.pdf (``Pipeline Settlement''); In the Matter of INET ATS, 
Inc., Securities Exchange Act Release No. 53631 (Apr. 12, 2006), 
https://www.sec.gov/litigation/admin/2006/34-53631.pdf (order 
instituting administrative and cease-and-desist proceedings, making 
findings, and imposing remedial sanctions and a cease-and-desist 
order); and In the Matter of BRUT, LLC, Securities Exchange Act 
Release No. 48718 (Oct. 30, 2003), http://www.sec.gov/litigation/admin/34-48718.htm (order instituting administrative and cease-and-
desist proceedings, making findings, and imposing remedial sanctions 
and a cease-and-desist order).
---------------------------------------------------------------------------

    Finally, due to the overlap between the operation of NMS Stock ATSs 
and the other operations of broker-dealer operators, the Commission is 
concerned that market participants have limited information about how 
the operations of the broker-dealer operator's business units or its 
affiliates may give rise to information leakage of subscribers' 
confidential trading information among those business units or 
affiliates. For instance, if a proprietary trading desk of the broker-
dealer operator is able to enter orders or other trading interest to 
the NMS Stock ATS, that trading desk may have means to see the incoming 
order flow of unaffiliated subscribers to the NMS Stock ATS. 
Furthermore, as demonstrated by several enforcement actions, a broker-
dealer operator may at times provide some subscribers--including its 
business units or those of its affiliates--access to certain trading 
information that it does not provide to others.\375\ Accordingly, the 
Commission preliminarily believes that the disclosure of certain 
information about the activities of the broker-dealer operator and its 
affiliates with respect to the NMS Stock ATS would enable market 
participants to better assess whether the potential for information 
leakage exists. The Commission preliminarily believes that such 
disclosures would help a market participant independently evaluate 
whether submitting order flow to a particular NMS Stock ATS aligns with 
its business interests and would help it achieve its investing or 
trading objectives.
---------------------------------------------------------------------------

    \375\ See id.
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B. Disclosures Required Under Part III of Proposed Form ATS-N

    Part III of proposed Form ATS-N would require that broker-dealer 
operators of NMS Stock ATSs include, as applicable, disclosures that 
pertain to the broker-dealer operator and its affiliates of an NMS 
Stock ATS. The Commission preliminarily believes that these proposed 
disclosure requirements would help ensure that market participants and 
the Commission are adequately informed about: (1) The operation of the 
NMS Stock ATS--regardless of the corporate structure of the NMS Stock 
ATS and that of its broker-dealer operator, or any arrangements the 
broker-dealer operator may have made, whether contractual or otherwise, 
pertaining to the operation of its NMS Stock ATS; and (2) any potential 
conflicts of interest the broker-dealer operator may have with respect 
to the operation of its NMS Stock ATS.
    The Commission has also considered other alternatives to address 
the potential conflicts of interest between NMS Stock ATSs and their 
broker-dealer operators.\376\ For example, the Commission could require 
an NMS Stock ATS to operate as a ``stand-alone'' entity having no 
affiliation with any broker-dealer that seeks to execute proprietary or 
agency orders in the NMS Stock ATS. This alternative would eliminate 
any potential conflicts of interest by requiring a broker-dealer that 
operates an NMS Stock ATS to have only a single business function--
operating the NMS Stock ATS--and eliminating any other functions, such 
as trading on a proprietary basis or routing customer orders. As 
another alternative, and short of requiring NMS Stock ATSs to operate 
on a stand-alone basis, the Commission could continue to permit broker-
dealer operators to continue to act as a broker-dealer operator of an 
NMS Stock ATS and engage in non-ATS functions while imposing new 
requirements designed to limit potential conflicts.
---------------------------------------------------------------------------

    \376\ See infra Section XIII.D.7 for a further discussion of 
alternatives to address potential conflicts of interest.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the above alternatives 
could be significantly more intrusive and substantially affect or limit 
the current operations of ATSs that trade NMS stocks relative to 
requiring additional disclosures about the operations of the broker-
dealer operator and its affiliates, and therefore is not proposing such 
alternatives at this time. The Commission is instead proposing that NMS 
Stock ATSs and their broker-dealer operators provide additional 
disclosures, both to the Commission and the public, about how they 
interact.
Request for Comment
    149. Do you believe that it is necessary to have some understanding 
of the broader activities of the broker-dealer operator and its 
affiliates in order to understand and evaluate the operation of an NMS 
Stock ATS? Why or why not? Please support your arguments.
    150. Do you believe that conflicts of interest could arise from a 
broker-dealer's operation of an NMS Stock ATS? Why or why not? If so, 
please explain what these conflicts of interest are. Do you believe 
that potential conflicts of interest should be disclosed to the public? 
Why or why not? Please support your arguments.
    151. Do you believe that certain conflicts of interest arising out 
of the broker-dealer's operation of the NMS Stock ATS should be 
prohibited? Why or why not? Please support your arguments.
    152. Do you believe that the Commission should adopt an alternative 
approach, either those described above or any other alternative, such 
as a prohibition, regarding potential conflicts of interest arising 
from a broker-dealer's operation of an NMS Stock ATS? Why or why not? 
Please support your arguments. If so, what approach should the 
Commission adopt? Please be specific.
    153. Do you believe that the Commission should require information 
barriers between the ATS and non-ATS business units of the broker-
dealer operator? Why or why not? Please support your arguments.
    154. Do you believe that the Commission should require an NMS Stock 
ATS to operate as a ``stand-alone'' entity and have no affiliation with 
any broker-dealer that seeks to execute proprietary or agency orders in 
the ATS? Why or why not? Please support your arguments. Do you believe 
that the proposed disclosures on Form ATS-N would help broker-dealers 
better assess whether the routing of their customers' orders to a 
particular NMS Stock ATS fulfills the broker-dealer's duty of best

[[Page 81044]]

execution? \377\ Why or why not? Please support your arguments.
---------------------------------------------------------------------------

    \377\ See supra notes 36-40 and accompanying text (relating to 
the duty of best execution).
---------------------------------------------------------------------------

    155. Do you believe that the proposed disclosures on Form ATS-N 
would help customers of broker-dealers to better evaluate whether their 
broker-dealer is fulfilling its duty of best-execution with respect to 
orders routed to NMS Stock ATSs? Why or why not? Please support your 
arguments.
1. Proposed Definitions of ``Affiliate'' and ``Control''
    For the purposes of the proposed disclosures regarding affiliates 
of the broker-dealer operator, the Commission is proposing to define 
the term ``affiliate'' to mean ``with respect to a specified person, 
any person that directly, or indirectly, controls, is under common 
control with, or is controlled by, the specified person.'' \378\ This 
proposed definition is consistent with the definition of an 
``affiliate'' for the purposes of Form 1 disclosures,\379\ and relates 
closely to the definition of a similar term under Regulation ATS.\380\
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    \378\ See Instruction G to proposed Form ATS-N.
    \379\ See Instruction B to Form 1; 17 CFR 249.1.
    \380\ See 17 CFR 242.300(c) (defining affiliate of a subscriber 
as any person that, directly or indirectly, controls, is under 
common control with, or is controlled by, the subscriber, including 
any employee).
---------------------------------------------------------------------------

    The Commission also proposes to amend the existing definition of 
the term ``control'' under Regulation ATS to add the phrase ``the 
broker-dealer of'' before the two instances of the phrase ``an 
alternative trading system'' and before the phrase ``the alternative 
trading system'' in subsections (2) and (3) of the definition.\381\ As 
proposed to be amended, ``control'' would mean ``the power, directly or 
indirectly, to direct the management or policies of the broker-dealer 
of an alternative trading system, whether through the ownership of 
securities, by contract, or otherwise. A person is presumed to control 
the broker-dealer of an alternative trading system, if that person (1) 
is a director, general partner, or officer exercising executive 
responsibility (or having similar status or performing similar 
functions); (2) directly or indirectly has the right to vote 25% or 
more of a class of voting securities or has the power to sell or direct 
the sale of 25% or more of a class of voting securities of the broker-
dealer of the alternative trading system; or (3) in the case of a 
partnership, has contributed, or has the right to receive, upon 
dissolution, 25% or more of the capital of the broker-dealer of the 
alternative trading system.'' \382\ The purpose of these amendments to 
the definition of control under Regulation ATS is to make clear that, 
because an ATS must register as a broker-dealer, control of the broker-
dealer of the ATS is control of the ATS, and that the broker-dealer 
(also referred to as the broker-dealer operator) is legally responsible 
for all operational aspects of the ATS and for ensuring that the ATS 
complies with applicable federal securities laws and the rules and 
regulations thereunder, including Regulation ATS.
---------------------------------------------------------------------------

    \381\ 17 CFR 242.300(f).
    \382\ See id. and Instruction G to proposed Form ATS-N.
---------------------------------------------------------------------------

    The proposed disclosures of affiliate activities under Part III of 
proposed Form ATS-N are designed to provide market participants and the 
Commission with a comprehensive understanding of the potential 
conflicts of interest that may arise from the broker-dealer operator's 
other business activities and its operation of the NMS Stock ATS. Under 
the proposed definition of ``affiliate'' and amended definition of 
``control,'' any affiliate of the broker-dealer operator of the NMS 
Stock ATS would be an affiliate of the NMS Stock ATS.\383\ The 
Commission preliminarily believes that the proposed definition of an 
``affiliate'' and amended definition of ``control'' would cover 
entities that have a close relationship with the broker-dealer operator 
and whose activities could raise potential conflicts of interest, or 
could otherwise be relevant to market participants in evaluating an NMS 
Stock ATS. Extending the proposed disclosures to affiliates of the 
broker-dealer operator could also reduce the potential for an entity to 
structure its organization in a way that would not provide complete 
disclosure of information in response to Part III of proposed Form ATS-
N. The Commission notes that the proposed disclosures related to 
affiliates extends to persons that control, are controlled by, or are 
under common control with the broker-dealer operator, and, as a result, 
parallels the disclosures related to ``control affiliates'' that are 
required in Form BD, to which broker-dealer operators are already 
subject.\384\
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    \383\ The instructions in proposed Form ATS-N would require an 
NMS Stock ATS to provide the identity of affiliates and business 
units of the broker-dealer operator, provide the name under which 
each affiliate or business unit conducts business (e.g., the formal 
name under which a proprietary trading desk of the broker-dealer 
operator conducts business) and the applicable CRD number and 
MPID(s) under which the affiliate or business unit conducts 
business.
    \384\ See Form BD at 2 (defining ``control affiliate'').
---------------------------------------------------------------------------

Request for Comment
    156. Should the Commission adopt the proposal to define 
``affiliate'' for purposes of proposed Form ATS-N as, with respect to a 
specified person, any person that, directly or indirectly, controls, is 
under common control with, or is controlled by, the specified person? 
Why or why not? Please support your arguments. Do you believe that the 
Commission should adopt a more limited or expansive definition of an 
``affiliate''? Why or why not? Please support your arguments. What 
advantages or disadvantages might result from a more limited or 
expansive definition of an affiliate? Please support your arguments.
    157. Do you believe that the Commission should use the definition 
of an ``affiliated person'' as defined in the Exchange Act for purposes 
of proposed Rule 304? \385\ Why or why not? Please support your 
arguments. If so, do you believe that the Commission should require 
disclosures about the activities of affiliated persons of the NMS Stock 
ATS, and/or affiliated persons of an affiliated person of an NMS Stock 
ATS? Why or why not? Please support your arguments.
---------------------------------------------------------------------------

    \385\ Under the Exchange Act, an ``affiliated person'' of 
another person means: Any person directly or indirectly owning, 
controlling, or holding with power to vote, 5 percent or more of the 
outstanding voting securities of such other person; any person 5 
percent or more of whose outstanding voting securities are directly 
or indirectly owned, controlled, or held with power to vote, by such 
other person; any person directly or indirectly controlling, 
controlled by, or under common control with, such other person; any 
officer, director, partner, copartner, or employee of such other 
person; if such other person is an investment company, any 
investment adviser thereof or any member of an advisory board 
thereof; and if such other person is an unincorporated investment 
company not having a board of directors, the depositor thereof. 15 
U.S.C. 78c(a)(19); 15 U.S.C. 80a-2(a)(3).
---------------------------------------------------------------------------

    158. Do you believe that the proposed amendments to the definition 
of ``control'' under Regulation ATS are appropriate in this context? Do 
you believe the Commission should adopt a more limited or expansive 
definition of ``control''? Why or why not? Please support your 
arguments.
    159. Do you believe the voting interest or partnership interest 
thresholds for ``control'' of an entity (i.e., 25% or more) should be 
higher or lower for purposes of Rule 304? For example, should the 
voting interest or partnership interest threshold for control of an 
entity to be presumed be 5%, 10%, 15%, 30%, or 50% for purposes of Rule 
304? If so, what is the appropriate percentage threshold and why would 
such alternate percentage threshold be more appropriate? Please support 
your arguments.

[[Page 81045]]

    160. Do you believe that the definition of ``control'' should deem 
an affiliate of the broker-dealer of the NMS Stock ATS to be an 
affiliate of the NMS Stock ATS, such that the ATS would be subject to 
all of the proposed disclosures relating these entities? Should the 
definition of ``control'' be amended? If so, how should it be amended? 
Please support your arguments.
    161. Do you believe that the information required to be filed on 
proposed Form ATS-N about affiliates of the NMS Stock ATS would provide 
useful information to market participants? Why or why not? Please 
support your arguments.
    162. Do you believe that the Commission should require that the 
MPID and/or CRD number for affiliates and business units of the broker-
dealer operator be disclosed on proposed Form ATS-N? Would such 
disclosure help market participants identify the broker-dealer 
operator's affiliates and business units? Why or why not? Please 
support your arguments.
2. Non-ATS Trading Centers of the Broker-Dealer Operator
    Part III, Item 1 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether the broker-dealer operator or any of its 
affiliates operate or control any non-ATS trading center(s) \386\ that 
is an OTC market maker or executes orders in NMS stocks internally by 
trading as principal or crossing orders as agent (``non-ATS trading 
centers''),\387\ and if so, to (1) identify the non-ATS trading 
center(s); and (2) describe any interaction or coordination between the 
identified non-ATS trading center(s) and the NMS Stock ATS including: 
(i) Circumstances under which subscriber orders or other trading 
interest (such as quotes, indications of interest (``IOI''), 
conditional orders or messages (hereinafter collectively referred to as 
``trading interest'')) sent to the NMS Stock ATS are displayed or 
otherwise made known to the identified non-ATS trading center(s) 
identified in Item 1(a) before entering the NMS Stock ATS; (ii) 
circumstances under which subscriber orders or other trading interest 
received by the broker-dealer operator or its affiliates may execute, 
in whole or in part, in the identified non-ATS trading center 
identified in Item 1(a) before entering the NMS Stock ATS; and (iii) 
circumstances under which subscriber orders or other trading interest 
are removed from the NMS Stock ATS and sent to the identified non-ATS 
trading center(s).\388\
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    \386\ A trading center is defined under Regulation NMS as a 
national securities exchange or national securities association that 
operates an SRO trading facility, an alternative trading system, 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). The Commission 
preliminarily believes that the last two components of the 
definition of a trading center (i.e., an OTC market maker and any 
other broker or dealer that executes orders internally by trading as 
principal or crossing orders as agent) are the trading centers for 
which conflicts of interests of the broker-dealer operator and its 
affiliates are relevant, as such trading centers operate as 
competing venues for the execution of NMS stock over-the-counter.
    \387\ References to non-ATS trading centers, as used herein, 
encompass all executions that occur off of an exchange and outside 
of an ATS, including when a broker-dealer is acting as an OTC 
market-maker, block positioner (i.e., any broker-dealer in the 
business of executing, as principal or agent, block size trades for 
its customers), or operation of an internal broker-dealer system. 
See 17 CFR 242.600(b)(52) (defining ``OTC market maker'' as any 
dealer that holds itself out as being willing to buy and sell to its 
customers, or others, in the United States, an NMS stock for its own 
account on a regular or continuous basis otherwise than on a 
national securities exchange in amounts of less than block size); 17 
CFR 242.600(b)(9) (defining ``block size'' as an order of at least 
10,000 shares or for a quantity of stock having a market value of at 
least $200,000); and 17 CFR 240.17a-3(a)(16)(ii)(A) (defining 
``internal broker-dealer system'' as any facility, other than a 
national securities exchange, an exchange exempt from registration 
based on limited volume, or an alternative trading system as defined 
in Regulation ATS that provides a mechanism, automated in full or in 
part, for collecting, receiving, disseminating, or displaying system 
orders and facilitating agreement to the basic terms of a purchase 
or sale of a security between a customer and the sponsor, or between 
two customers of the sponsor, through use of the internal broker-
dealer system or through the broker or dealer sponsor of such 
system). See also 2010 Equity Market Structure Release, supra note 
124, at 3599-3600.
    \388\ See Part III, Item 1 of proposed Form ATS-N.
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    The Commission is aware that many broker-dealer operators of ATSs 
that currently trade NMS stocks facilitate the execution of NMS stock 
outside of their ATSs.\389\ As discussed above, a broker-dealer 
operator is permitted to engage in broker or dealer activities 
independent of its operation of an ATS, such as operating proprietary 
trading desks; the proposed rules do not eliminate or otherwise 
restrict such activities. The Commission, however, is proposing to 
require the public disclosure on proposed Form ATS-N of such activities 
as they relate to the NMS Stock ATS. As noted above, the Commission 
preliminarily believes that circumstances could arise whereby a broker-
dealer operator of an NMS Stock ATS may place the interests of its or 
its affiliates' non-ATS trading center ahead of the interests of the 
operations of the NMS Stock ATS and its subscribers. The Commission 
recognizes the sensitive nature of the confidential trading information 
of subscribers to an ATS and the potential for its misuse. The 
Commission preliminarily believes that non-ATS trading centers of a 
broker-dealer operator of an NMS Stock ATS or its affiliates may have 
incentives, and the opportunity to access, NMS Stock ATS subscriber 
orders received by the broker-dealer operator, which may result in 
information leakage.
---------------------------------------------------------------------------

    \389\ See, e.g., Laura Tuttle, Over-the-Counter Trading: 
Description of Non-ATS OTC Trading in National Market System Stocks 
(March 2014), http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that subscribers 
to NMS Stock ATSs currently have limited information about the various 
non-ATS trading centers operated by an NMS Stock ATS broker-dealer 
operator, or its affiliates, and the extent to which the operations of 
these non-ATS trading centers may interact with subscriber orders or 
other trading interest sent to the NMS Stock ATS. Orders or other 
trading interest sent by subscribers to the NMS Stock ATS may pass 
through the broker-dealer operator's systems or functionality before 
being entered into the NMS Stock ATS. Such systems and functionalities, 
which could include a common gateway function, algorithm, or smart 
order router, may be used to support the broker-dealer operator's other 
business units, including any non-ATS trading centers. The broker-
dealer operator typically controls the logic contained in these systems 
or functionality that determines where an order that the broker-dealer 
receives will be handled or sent. The Commission preliminarily believes 
that it would be helpful for NMS Stock ATS subscribers to know the 
extent to which subscriber orders received by the broker-dealer 
operator may interact, or be handled in any coordinated manner, with a 
non-ATS trading center of that broker-dealer operator or its 
affiliates.\390\

[[Page 81046]]

In addition, Form ATS-N would require the disclosure of circumstances 
under which subscriber orders or other trading interest received by the 
broker-dealer operator may execute, in whole or in part, in a non-ATS 
trading center(s) operated by the broker-dealer operator or its 
affiliates before entering the NMS Stock ATS; the circumstances under 
which subscriber orders or other trading interest would be displayed or 
otherwise made known to the systems or personnel operating the non-ATS 
trading center(s); and the circumstances under which subscriber orders 
or other trading interest are removed from the NMS Stock ATS and sent 
to the non-ATS trading center(s) for execution. To the extent that the 
broker-dealer operator or its affiliates operate a non-ATS trading 
center(s), but NMS Stock ATS subscribers' orders could not execute, 
route, or otherwise be shared with that non-ATS trading center(s), the 
NMS Stock ATS could note this fact in Part III, Item 1 of proposed Form 
ATS-N.
---------------------------------------------------------------------------

    \390\ As noted above, the Commission is aware that most of the 
broker-dealer operators of ATSs that currently trade NMS stocks also 
facilitate the execution of NMS stocks in non-ATS trading centers 
outside of the NMS Stock ATS. See supra note 364 and accompanying 
text. In October of 2013, the Commission and its staff estimated 
that about 16.99% of total dollar volume (18.75% of share volume) of 
NMS stocks is executed over-the-counter (``OTC'') without the 
involvement of an ATS. In contrast, the Commission and its staff 
estimated that ATSs comprise 11.31% of total dollar volume (12.04% 
of share volume). See Tuttle: ATS Trading in NMS Stocks, supra note 
126, at 2. Given that a greater percentage of OTC executions in NMS 
stock occur outside of ATSs rather than inside of ATSs, the 
Commission preliminarily believes that some disclosure of the 
presence of these non-ATS trading centers is appropriate. 
Accordingly, to the extent that an NMS Stock ATS subscriber's orders 
may execute, be displayed, or otherwise made known in a non-ATS 
trading center operated by or affiliated with the broker-dealer 
operator, the Commission preliminarily believes that disclosure of 
such possibility would be relevant to market participants in 
deciding whether to subscribe or route orders to a particular NMS 
Stock ATS.
---------------------------------------------------------------------------

    The disclosures in Part III, Item 1 of proposed Form ATS-N are 
designed to reduce information asymmetries between subscribers and the 
broker-dealer operator regarding the operation of the NMS Stock ATS and 
competing venues for the execution of NMS stock transactions (i.e., 
non-ATS trading centers) that the broker-dealer operator operates and 
the circumstances in which the broker-dealer operator may handle or 
choose to execute subscriber orders outside of the NMS Stock ATS that 
might otherwise have been sent to the NMS Stock ATS.
Request for Comment
    163. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 1 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    164. Do you believe Part III, Item 1 of proposed Form ATS-N 
captures the information regarding non-ATS trading centers operated or 
controlled by the broker-dealer operator or any of its affiliates that 
is most relevant to understanding the operations of the NMS Stock ATS? 
Why or why not? Please support your arguments.
    165. Do you believe there is other information that market 
participants might find relevant or useful regarding non-ATS trading 
centers operated or controlled by the broker-dealer operator or any of 
its affiliates? If so, describe such information and explain whether, 
and if so why, such information should be required to be provided under 
proposed Form ATS-N. Please support your arguments.
    166. Do you believe that Part III, Item 1 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required? If not, how should Part III, Item 1 of proposed Form ATS-N be 
revised to provide additional clarity? Please explain in detail.
    167. Do you believe that the non-ATS trading centers operated by 
the broker-dealer operator or its affiliates could raise potential 
conflicts of interest? Why or why not? If so, do you believe that such 
potential conflicts of interest should be disclosed? Please support 
your arguments.
    168. Part III, Item 1 of proposed Form ATS-N would require 
disclosure about the non-ATS trading center activities of affiliates of 
the broker-dealer operator. Do you believe that disclosure about the 
activities of the broker-dealer operator's affiliates in this context 
is necessary? Why or why not? Should disclosure of non-ATS trading 
center activities extend to more remote affiliates under a revised 
definition of ``affiliate''? \391\ Should disclosure of non-ATS trading 
center activities apply to a more limited set of affiliates? Why or why 
not? Please support your arguments.
---------------------------------------------------------------------------

    \391\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

    169. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 1 of proposed Form ATS-N? Do you 
believe the proposed disclosures in Part III, Item 1 have the potential 
to impact innovation? Why or why not? Do you believe that the proposed 
disclosures in Part III, Item 1 of proposed Form ATS-N would require 
broker-dealer operators of NMS Stock ATSs to reveal too much (or not 
enough) information about their structure and operations? Why or why 
not? Please support your arguments.
    170. Do you believe there is other information that market 
participants might find relevant or useful regarding the disclosure of 
non-ATS trading centers operated by the broker-dealer operator or its 
affiliates? If so, describe such information and explain whether or not 
such information should be required to be provided under proposed Form 
ATS-N. Please support your arguments.
    171. Do you believe there is any information regarding the non-ATS 
trading centers of the broker-dealer operator or its affiliates that 
should not be required to be disclosed on proposed Form ATS-N due to 
concerns regarding confidentiality, business reasons, trade secrets, 
burden, or any other concerns? If so, what information and why? Please 
support your arguments.
    172. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
1 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 1?
3. Multiple NMS Stock ATS Operations of the Broker-Dealer Operator
    Part III, Item 2 of proposed Form ATS-N would require an NMS Stock 
ATS to state whether the broker-dealer operator, or any of its 
affiliates, operates one or more NMS Stock ATSs other than the NMS 
Stock ATS named on the Form ATS-N, and, if so, to (1) Identify the NMS 
Stock ATS(s) and provide its MPID(s); and (2) describe any interaction 
or coordination between the identified NMS Stock ATS(s) and the NMS 
Stock ATS named on the Form ATS-N including: (i) The circumstances 
under which subscriber orders or other trading interest received by the 
broker-dealer operator or its affiliates to be sent to the NMS Stock 
ATS named on the Form ATS-N may be sent to any identified NMS Stock 
ATS(s); (ii) circumstances under which subscriber orders or other 
trading interest to be sent to the NMS Stock ATS named on the Form ATS-
N are displayed or otherwise made known in any other identified NMS 
Stock ATS(s); and (iii) the circumstances under which subscriber orders 
or other trading interest received by the NMS Stock ATS named on the 
Form ATS-N may be removed and sent to any other identified NMS Stock 
ATS(s).\392\
---------------------------------------------------------------------------

    \392\ See Part III, Item 2 of proposed Form ATS-N.
---------------------------------------------------------------------------

    The Commission is aware that some broker-dealer operators operate 
multiple ATSs that trade NMS stocks and that subscriber orders or other 
trading interest received by such broker-dealer operators could be 
routed between those NMS Stock ATSs. The Commission preliminarily 
believes that--similar to the potential conflicts of interest that may 
arise or information leakage that may occur when a broker-dealer 
operator, or its affiliate, operates or controls a non-ATS trading 
center--circumstances might arise whereby a broker-dealer that operates 
multiple NMS Stock ATSs may place its interests ahead of the interests 
of subscribers of

[[Page 81047]]

one or more of its NMS Stock ATSs.\393\ To the extent that the broker-
dealer operator or its affiliates operate multiple NMS Stock ATSs, but 
the subscribers' orders of the NMS Stock ATS named in the Form ATS-N 
filing could not execute, route, be displayed, or otherwise made known 
to the NMS Stock ATS(s) identified in Item 2(a) of proposed Form ATS-N, 
the NMS Stock ATS could note this fact in Part III, Item 2 of proposed 
Form ATS-N.
---------------------------------------------------------------------------

    \393\ See supra note 368.
---------------------------------------------------------------------------

    Therefore, under Part III, Item 2 of proposed Form ATS-N, a broker-
dealer operator that operates multiple NMS Stock ATSs would be required 
to disclose how these trading venues interact with one another, if at 
all. To the extent that a broker-dealer operator could allocate 
subscriber orders it receives among the various NMS Stock ATSs that it 
or its affiliates operate, the broker-dealer operator would be required 
to describe how it determines such allocation in response to Item 2. 
For example, a broker-dealer operator may send all subscriber orders 
that it receives first to one of its NMS Stock ATSs, and if there is no 
execution after a certain period of time, the orders may then be routed 
directly to a second NMS Stock ATS operated by the broker-dealer 
operator or its affiliates, or may be returned to the broker-dealer 
operator (or its SOR or similar functionality), and may then be routed 
to a non-affiliated NMS Stock ATS for execution. Similarly, an NMS 
Stock ATS would be required to describe the circumstances under which 
subscriber orders on the NMS Stock ATS might be removed from the NMS 
Stock ATS and routed to another NMS Stock ATS that is operated by that 
broker-dealer operator or its affiliates.\394\
---------------------------------------------------------------------------

    \394\ As is the case with the proposed disclosures under Part 
III, Item 1 of proposed Form ATS-N in regard to non-ATS trading 
centers, Part III, Item 2 of proposed Form ATS-N would require an 
NMS Stock ATS to disclose whether any affiliates of the broker-
dealer operator operates an NMS Stock ATS. This disclosure is 
designed to elicit certain information about the relationship of 
related NMS Stock ATSs, regardless of the organizational structure 
of the broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

    The Commission preliminarily believes that subscribers to NMS Stock 
ATSs currently have limited information about the extent to which the 
operations of other ATSs operated by the same broker-dealer operator, 
or its affiliates, may interact with their orders sent to the NMS Stock 
ATS. Specifically, because subscriber orders received by a broker-
dealer operator could be sent to multiple NMS Stock ATSs operated by 
that broker-dealer operator, the Commission preliminarily believes that 
subscribers should be provided with a better understanding of how their 
orders may interact, if at all, with multiple NMS Stock ATSs operated 
by the same broker-dealer operator or its affiliates. The proposed 
disclosures in Part III, Item 2 of proposed Form ATS-N are designed to 
help subscribers evaluate potential conflicts of interest for the 
broker-dealer operator or the potential for information leakage in 
connection with multiple NMS Stock ATSs that the broker-dealer 
operator, or its affiliates, operates.\395\ Accordingly, the Commission 
preliminary believes that the disclosures required under Part III, Item 
2 of proposed Form ATS-N would provide market participants with better 
information about how orders would be handled by a broker-dealer 
operator that operates multiple NMS Stock ATSs and the potential 
conflicts of interest and potential for information leakage that might 
arise as a result of such a business structure.
---------------------------------------------------------------------------

    \395\ The Commission notes that a broker-dealer operator may 
have valid business reasons for operating multiple NMS Stock ATSs, 
and the Commission is not proposing to limit the ability for a 
broker-dealer operator to operate multiple NMS Stock ATSs. For 
example, the broker-dealer operator may establish several NMS Stock 
ATSs so that each NMS Stock ATS offers subscribers specific trading 
services (block order executions) or other particular trading 
functionalities (e.g., an auction mechanism or a limit order book).
---------------------------------------------------------------------------

Request for Comment
    173. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 2 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    174. Do you believe Part III, Item 2 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding any other NMS Stock ATSs 
(other than the one named on the Form ATS-N) operated or controlled by 
the broker-dealer operator or any of its affiliates? Why or why not? 
Please support your arguments.
    175. Do you believe that Part III, Item 2 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required? If not, how should Part III, Item 2 of proposed Form ATS-N be 
revised to provide additional clarity? Please explain.
    176. Do you believe that the operation of multiple NMS Stock ATSs 
by the broker-dealer operator or its affiliates could raise potential 
conflicts of interest? Why or why not? If so, do you believe that such 
potential conflicts of interest should be disclosed? Please support 
your arguments.
    177. Do you believe that the information that would be solicited by 
Part III, Item 2 of proposed Form ATS-N would be useful to market 
participants in deciding whether the participate on an NMS Stock ATS? 
Why or why not? Please support your arguments.
    178. Part III, Item 2 of proposed Form ATS-N would require 
disclosure of whether the affiliates of the broker-dealer operator 
operate an NMS Stock ATS (other than the NMS Stock ATS filing the Form 
ATS-N). Do you believe that disclosure about affiliates of the broker-
dealer operator in this context is necessary? Why or why not? Should 
disclosure of affiliates that operate another NMS Stock ATS be extended 
to more remote affiliates under a revised definition of ``affiliate''? 
\396\ Should disclosure apply to a more limited set of affiliates? Why 
or why not? Please support your arguments.
---------------------------------------------------------------------------

    \396\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

    179. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 2 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 2 of proposed Form ATS-N 
would have the potential to impact innovation? Why or why not? Would 
the proposed disclosures in Part III, Item 2 of proposed Form ATS-N 
require broker-dealer operators of NMS Stock ATSs to reveal too much 
(or not enough) information about their structure and operations? Why 
or why not? Please support your arguments.
    180. Do you believe there is other information that market 
participants might find relevant or useful regarding the operation of 
multiple NMS Stock ATSs by a broker-dealer operator or its affiliate? 
If so, describe such information and explain whether, and if so why, 
such information should be required to be provided under proposed Form 
ATS-N. Please support your arguments.
    181. Do you believe that the Commission should require NMS Stock 
ATSs to disclose the names of any non-NMS stock ATSs that are operated 
by its broker-dealer operator or one of its broker-dealer operator's 
affiliates? Why or why not? If so, what information should the NMS 
Stock ATS be required to disclose about such non-NMS stock ATSs? Please 
support your arguments.
    182. Do you believe there is any information regarding the multiple 
NMS Stock ATS operations of a broker-dealer operator that the NMS Stock 
ATS

[[Page 81048]]

should not be required to disclose on proposed Form ATS-N due to 
concerns regarding confidentiality, business reasons, trade secrets, 
burden, or any other concerns? If so, what information and why? Please 
explain.
    183. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
2 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 2?
4. Products or Services Offered to Subscribers by the Broker-Dealer 
Operator
    Part III, Item 3 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether the broker-dealer operator, or any of its 
affiliates, offer subscribers of the NMS Stock ATS any products or 
services used in connection with trading on the NMS Stock ATS (e.g., 
algorithmic trading products, market data feeds). If so, the NMS Stock 
ATS would be required to describe the products and services and 
identify the types of subscribers (e.g., retail, institutional, 
professional) to which such services or products are offered, and if 
the terms and conditions of the services or products are not the same 
for all subscribers, describe any differences.\397\
---------------------------------------------------------------------------

    \397\ See Part III, Item 3 of proposed Form ATS-N.
---------------------------------------------------------------------------

    Based on the Commission's experience, broker-dealer operators of 
NMS Stock ATSs may, directly or indirectly through an affiliate, offer 
products or services to subscribers in addition to the trading services 
of the NMS Stock ATS. For example, a broker-dealer operator may offer 
subscribers the use of an order management system to allow them to 
connect to or send orders or other trading interest to the NMS Stock 
ATS. Some broker-dealer operators may also offer subscribers the use of 
algorithmic trading strategies, which are computer assisted trading 
tools that, for instance, may be used by or on behalf of institutional 
investors to execute orders that are typically too large to be executed 
all at once without excessive price impact, and divide the orders into 
many small orders that are fed into the marketplace over time.\398\ In 
some cases, a broker-dealer operator offering products or services in 
connection with a subscriber's use of the NMS Stock ATS may result in 
the subscribers receiving more favorable terms from the broker-dealer 
operator with respect to their use of the NMS Stock ATS. For example, 
if a subscriber purchases a service offered by the broker-dealer 
operator of an NMS Stock ATS, the broker-dealer operator might also 
provide that subscriber more favorable terms for their use of the NMS 
Stock ATS than other subscribers who do not purchase the service. Such 
favorable terms could include fee discounts or access to a faster 
connection line to the NMS Stock ATS. Additionally, a broker-dealer 
operator of an NMS Stock ATS may only offer certain products and 
services to certain subscribers or may offer products and services on 
different terms to different categories of subscribers. The Commission 
preliminarily believes that market participants would want to know, 
when assessing an NMS Stock ATS as a potential trading venue, the range 
of services or products that the broker-dealer operator or its 
affiliates may offer subscribers of the NMS Stock ATS because such 
services or products may have an impact on the subscribers' access to, 
or trading on, the NMS Stock ATS.
---------------------------------------------------------------------------

    \398\ See Staff of the Division of Trading and Markets, 
Commission, ``Equity Market Structure Literature Review, Part II: 
High Frequency Trading,'' at 5 (March 18, 2014), http://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
---------------------------------------------------------------------------

Request for Comment
    184. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 3 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    185. Do you believe Part III, Item 3 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding other products or services 
offered to subscribers used in connection with trading on the NMS Stock 
ATS by the broker-dealer operator or any of its affiliates? Why or why 
not? Please support your arguments.
    186. Do you believe that Part III, Item 3 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required? If not, how should Part III, Item 3 of proposed Form ATS-N be 
revised to provide additional clarity? Please explain in detail.
    187. Do you believe there is other information that market 
participants might find relevant or useful regarding other products and 
services offered to subscribers by broker-dealer operators or their 
affiliates? If so, describe such information and explain whether, and 
if so why, such information should be required to be provided under 
proposed Form ATS-N. Please support your arguments.
    188. Do you believe that the Commission should expand the proposed 
disclosures in Part III, Item 3 of proposed Form ATS-N to products or 
services offered by the broker-dealer operator or its affiliates that 
are offered to subscribers, but not necessarily offered in connection 
with transacting on the NMS Stock ATS? Why or why not? Please explain. 
Do you believe there is other information that market participants 
might find useful regarding the products or services offered to 
subscribers by the broker-dealer operator or its affiliates? If so, 
what information should be added to the disclosure requirements? Please 
explain.
    189. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 3 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 3 of proposed Form ATS-N 
would have the potential to impact innovation? Why or why not? Would 
the proposed disclosures in Part III, Item 3 of proposed Form ATS-N 
require broker-dealer operators of NMS Stock ATSs to reveal too much 
(or not enough) information about their structure and operations? Why 
or why not? Please support your arguments.
    190. Do you believe there is any information regarding the products 
or services offered to subscribers by the broker-dealer operator that 
the NMS Stock ATS should not be required to disclose on proposed Form 
ATS-N due to concerns regarding confidentiality, business reasons, 
trade secrets, burden, or any other concerns? If so, what information 
and why? Please support your arguments.
    191. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
3 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 3?
5. Broker-Dealer Operator Arrangements With Unaffiliated Trading 
Centers
    Part III, Item 4 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether the broker-dealer operator or any of its 
affiliates have any formal or informal arrangement with an unaffiliated 
person(s), or affiliate(s) of such person, that operates a trading 
center \399\ regarding access to the NMS Stock ATS,

[[Page 81049]]

including preferential routing arrangements. If so, the NMS Stock ATSs 
would be required to identify the person(s) and the trading center(s) 
and to describe the terms of the arrangement(s).\400\
---------------------------------------------------------------------------

    \399\ See supra note 386 (defining trading center).
    \400\ See Part III, Item 4 of proposed Form ATS-N.
---------------------------------------------------------------------------

    Part III, Item 4 of proposed Form ATS-N is designed to inform 
subscribers and the Commission about arrangements that may impact a 
subscriber's experience on the NMS Stock ATS and allow market 
participants to evaluate potential conflicts of interest of the broker-
dealer operator. For example, Part III, Item 4 of proposed Form ATS-N 
would require an NMS Stock ATS to disclose whether its broker-dealer 
operator has any arrangement with another unaffiliated NMS Stock ATS 
pursuant to which the NMS Stock ATS would route orders or other trading 
interest to the unaffiliated NMS Stock ATS for possible execution prior 
to routing to any other destination. Similarly, Part III, Item 4 of 
proposed Form ATS-N would require disclosure of an arrangement pursuant 
to which any subscriber orders routed out of the unaffiliated NMS Stock 
ATS would be routed first to the NMS Stock ATS before any other trading 
center, and would also require disclosure of the terms of the 
arrangement, for example, whether the NMS Stock ATS was providing 
monetary compensation or some other brokerage service to the 
unaffiliated NMS Stock ATS in exchange for the order flow.\401\
---------------------------------------------------------------------------

    \401\ The Commission notes that a broker-dealer operator may 
have valid business reasons for it or its affiliates to have formal 
or informal arrangements with an unaffiliated person(s), or 
affiliate(s) of such person, that operates a trading center 
regarding access to the NMS Stock ATS. The Commission is not 
proposing to limit the ability for a broker-dealer operator to have 
such arrangements.
---------------------------------------------------------------------------

    The Commission preliminarily believes that market participants 
would consider information about any arrangements between a broker-
dealer operator of an NMS Stock ATS and other trading centers relevant 
to their evaluation of an NMS Stock ATS as a potential trading venue. 
The disclosure of such arrangements could reveal potential conflicts of 
interest of the broker-dealer operator or could identify potential 
sources of information leakage. For example, a potential conflict of 
interest could arise where an NMS Stock ATS has a preferred routing 
arrangement with an unaffiliated non-ATS trading center that provides 
that all orders sent to the NMS Stock ATS would first be routed to the 
unaffiliated non-ATS trading center before entering the NMS Stock ATS 
in exchange for monetary compensation. Such an arrangement could also 
pose a risk of information leakage in that the non-ATS trading center 
would know that those orders that it does not execute would be routed 
to the NMS Stock ATS.\402\ Part III, Item 4 of proposed Form ATS-N 
would also require disclosure of mutual access arrangements between an 
NMS Stock ATS and other trading centers whereby, for example, a broker-
dealer operator or its affiliates may offer access to its NMS Stock ATS 
in exchange for access to the NMS Stock ATS of another broker-dealer 
operator.
---------------------------------------------------------------------------

    \402\ Alternatively, if an arrangement between the NMS Stock ATS 
and unaffiliated trading center provided that any subscriber orders 
routed out of the NMS Stock ATS would be first routed to the 
unaffiliated non-ATS trading center, the NMS Stock ATS may have an 
incentive to remove subscribers' orders from the NMS Stock ATS and 
allow the unaffiliated non-ATS trading center the opportunity to 
execute those orders.
---------------------------------------------------------------------------

    The Commission notes that an NMS Stock ATS would not be prohibited 
from establishing arrangements with other trading centers, provided 
that such arrangements comply with other applicable laws and rules, 
including applicable federal securities laws and Regulation ATS. 
However, the Commission preliminarily believes that market participants 
could benefit from disclosures about such arrangements and would use 
such information when determining whether to subscribe, or route 
orders, to a particular NMS Stock ATS. Additionally, the Commission 
preliminarily believes that disclosure of such arrangements would help 
the Commission perform its oversight functions by enabling it to better 
evaluate an NMS Stock ATS's compliance with the requirements of 
Regulation ATS, such as Rule 301(b)(10).
Request for Comment
    192. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 4 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    193. Do you believe Part III, Item 4 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding any formal or informal 
arrangement by the broker-dealer operator or any of its affiliates with 
an unaffiliated person(s), or affiliate(s) of such person, that 
operates a trading center \403\ regarding access to the NMS Stock ATS, 
including preferential routing arrangements? Why or why not? Please 
support your arguments.
---------------------------------------------------------------------------

    \403\ See supra note 386 (defining trading center).
---------------------------------------------------------------------------

    194. Do you believe that Part III, Item 4 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required relating to access arrangements and preferred routing 
arrangements with other unaffiliated trading centers? If not, how 
should Part III, Item 4 of proposed Form ATS-N be revised to provide 
additional clarity? Please explain.
    195. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 4 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 4 of proposed Form ATS-N 
would have the potential to impact innovation? Why or why not? Would 
the proposed disclosures in Part III, Item 4 of proposed Form ATS-N 
require broker-dealer operators of NMS Stock ATSs to reveal too much 
(or not enough) information about their structure and operations? Why 
or why not? Please support your arguments.
    196. Do you believe that the Commission should include access 
arrangements of affiliates of the broker-dealer operator in Part III, 
Item 4 of proposed Form ATS-N? Why or why not? Please support your 
arguments. Conversely, should disclosures of arrangements with other 
trading centers by affiliates be extended to more remote affiliates 
under a revised definition of ``affiliate''? \404\ Should disclosure 
apply to a more limited set of affiliates? Why or why not? Please 
support your arguments.
---------------------------------------------------------------------------

    \404\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

    197. Do you believe that the Commission should expand the proposed 
disclosure requirements to other arrangements beyond access and 
preferred routing that the broker-dealer operator or its affiliates 
might have with other trading centers? If so, what other arrangements 
do you believe should be disclosed? Please explain in detail.
    198. Do you believe that the Commission should limit or expand in 
any way the proposed disclosure requirements to require disclosure of 
arrangements regarding access by the broker-dealer operator or its 
affiliates to both other trading centers and affiliates of those other 
trading centers? Why or why not? Please support your arguments.
    199. Do you believe there is other information that market 
participants might find relevant or useful regarding the broker-dealer 
operator or its affiliates' arrangements with other trading centers? If 
so, describe such information and explain whether, and if so why, such 
information should be

[[Page 81050]]

required to be provided under proposed Form ATS-N. Please support your 
arguments.
    200. Do you believe there is any information regarding the broker-
dealer operator or its affiliates' arrangements with other trading 
centers that the NMS Stock ATS should not be required to disclose on 
proposed Form ATS-N due to concerns regarding confidentiality, business 
reasons, trade secrets, burden, or any other concerns? If so, what 
information and why? Please support your arguments.
    201. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
4 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 4?
6. Trading on the NMS Stock ATS by the Broker-Dealer Operator and Its 
Affiliates
    Part III, Item 5 of proposed Form ATS-N would require certain 
disclosures related to the trading activity of the broker-dealer 
operator or its affiliates on the NMS Stock ATS. Specifically, Part 
III, Item 5 of proposed Form ATS-N would require the NMS Stock ATS to 
disclose whether the broker-dealer operator, or any of its affiliates, 
enters orders or other trading interest on the NMS Stock ATS. If so, 
the NMS Stock ATS would be required to: (1) Identify each affiliate and 
business unit of the broker-dealer operator that may enter orders or 
other trading interest on the NMS Stock ATS; (2) describe the 
circumstances and capacity (e.g., proprietary, agency) in which each 
identified affiliate and business unit enters orders or other trading 
interest on the NMS Stock ATS; (3) describe the means by which each 
identified affiliate and business unit enters orders or other trading 
interest on the NMS Stock ATS (e.g., directly through a FIX connection 
to the NMS Stock ATS, or indirectly, by way of the broker-dealer 
operator's SOR (or similar functionality), algorithm, intermediate 
application, or sales desk); and (4) describe any means by which a 
subscriber can be excluded from interacting or trading with orders or 
other trading interest of the broker-dealer operator or its affiliates 
on the NMS Stock ATS.\405\
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    \405\ The Commission notes that a broker-dealer operator may 
have valid business reasons for it or its affiliates to trade on the 
NMS Stock ATS. The Commission is not proposing to limit the ability 
for a broker-dealer operator to trade on any such NMS Stock ATS.
---------------------------------------------------------------------------

    As noted above, Part III, Item 5(a) of proposed Form ATS-N would 
require the NMS Stock ATS to identify each affiliate and business unit 
(e.g., a sales desk or proprietary trading unit) and affiliate of the 
broker-dealer operator that can enter orders or other trading interest 
on the NMS Stock ATS. The Commission preliminarily believes that 
disclosure of whether a broker-dealer operator of an NMS Stock ATS or 
its affiliates may trade on that NMS Stock ATS would be important to 
subscribers with respect to the potential conflicts of interest that 
may arise from the unique position the broker-dealer operator occupies 
in relation to the NMS Stock ATS. If the person that operates and 
controls a trading center is also able to trade on that trading center, 
there may be an incentive to design the operations of the trading 
center to favor the trading activity of the operator of the trading 
center or affiliates of the operator.\406\ The operator of a trading 
center that also trades on the trading center it operates would likely 
have informational advantages over others trading on the trading center 
such as a better understanding of the manner in which the system 
operates or who is trading on the trading center. In the most egregious 
case, the operator of the trading center might use the confidential 
trading information of other traders to advantage its own trading on 
that trading center, which, in context of an ATS, would violate Rule 
301(b)(10). Accordingly, the Commission believes that subscribers would 
benefit from knowing whether and how a broker-dealer operator or its 
affiliates trade on the NMS Stock ATS to which they may route orders or 
become a subscriber. Such information would allow market participants 
to evaluate the extent of the potential conflicts of interest posed by 
the broker-dealer operator or its affiliates' participation on the NMS 
Stock ATS and to inquire further about such trading activity if they 
choose.
---------------------------------------------------------------------------

    \406\ See supra note 370 and accompanying text.
---------------------------------------------------------------------------

    Part III, Item 5(b) of proposed Form ATS-N would require an NMS 
Stock ATS to disclose the circumstances and capacity in which the 
broker-dealer operator's business units or affiliates may trade on the 
NMS Stock ATS, such as whether they are trading on a proprietary basis 
(i.e., for their own accounts) or agency basis or both. This disclosure 
is meant to provide insight as to the nature of the trading of the 
broker-dealer operator and/or its affiliates. The Commission 
preliminarily believes that market participants would find this 
information useful in evaluating NMS Stock ATSs because they may 
perceive agency trading by the broker-dealer operator or its affiliates 
as posing less of a conflict of interest as compared to proprietary 
trading. For example, market participants may perceive a lesser 
potential for a conflict of interest if the broker-dealer operator 
discloses that the broker-dealer operator or its affiliates trade on 
its own NMS Stock ATS only in an agency capacity with its customers' 
orders as opposed to trading on the NMS Stock ATS in a principal 
capacity on a proprietary basis--where the broker-dealer operator or 
its affiliates may have increased incentives to use their informational 
advantage in operating the NMS Stock ATS to advance their trading 
opportunities.\407\ Alternatively, market participants could conclude 
that the broker-dealer operator's agency trading on its own NMS Stock 
ATS could nevertheless pose an unacceptable conflict of interest as the 
broker-dealer operator may be able to advantage its customers' orders 
to the disadvantage of subscribers to the NMS Stock ATS. The Commission 
proposes to provide market participants with information regarding the 
nature of the trading activity of the broker-dealer operator and its 
affiliates on the NMS Stock ATS so that subscribers (and potential 
subscribers) can evaluate potential conflicts of interest that may 
arise from that trading activity.
---------------------------------------------------------------------------

    \407\ See supra note 368.
---------------------------------------------------------------------------

    Part III, Item 5(c) of proposed Form ATS-N would require an NMS 
Stock ATS to describe the means by which the business units of the 
broker-dealer operator and its affiliates enter orders or other trading 
interest into the NMS Stock ATS. Item 5(d) would require a description 
of any means by which a subscriber can be excluded from interacting or 
trading with orders or other trading interest of the broker-dealer 
operator or its affiliates. Some NMS Stock ATSs that currently transact 
in NMS stocks may provide both direct and indirect means for 
subscribers to enter orders or other trading interest to the ATS. Based 
on its experience, the Commission understands that subscribers to some 
NMS Stock ATSs may enter orders or other trading interest directly to 
the ATS using, for example, a direct FIX connection,\408\ while other 
subscribers may enter

[[Page 81051]]

orders or other trading interest indirectly to the ATS using, for 
example, an algorithm, the broker-dealer operator's smart order 
router,\409\ or the broker-dealer operator's sales desks. As such, 
there are a variety of means by which business units of the broker-
dealer operator or its affiliates of the broker-dealer operator may 
connect to, and enter orders on, an NMS Stock ATS. The Commission 
preliminarily believes that market participants evaluating NMS Stock 
ATSs may find this information relevant in assessing any potential 
advantages that the broker-dealer operator or its affiliates may have 
over other subscribers to the NMS Stock ATS. For example, an NMS Stock 
ATS may permit orders or other trading interest of all of its 
affiliates that trade on the NMS Stock ATS to enter through a means 
that can be used only by the broker-dealer operator or its affiliates 
and not by non-affiliated subscribers to the NMS Stock ATS (e.g., 
bypassing the broker-dealer operator's SOR). The Commission 
preliminarily believes that market participants would want to know 
these circumstances, as the difference in access or order entry could 
result in certain advantages, such as the speed at which orders could 
be entered or cancelled. Moreover, the Commission preliminarily 
believes that based on how a broker-dealer operator's business units or 
affiliates access and trade on an NMS Stock ATS--or on other 
considerations--certain subscribers may not wish to interact with the 
order flow of the broker-dealer operator or its affiliates. 
Accordingly, the Commission preliminarily believes that it is important 
for market participants to have the information to elect whether and 
how they may avoid trading against orders or other trading interest of 
the broker-dealer operator or its affiliates on an NMS Stock ATS to 
achieve their investing or trading objectives.
---------------------------------------------------------------------------

    \408\ To the extent that a subscriber to the NMS Stock ATS 
directly sends an order to the NMS Stock ATS by way of FIX protocol, 
the NMS Stock ATS should identify and describe any intermediate 
functionality that the subscriber order may pass through on its way 
to the NMS Stock ATS as part of the FIX process.
    \409\ See infra Section VII.B.7 (discussing the use of smart 
order routers by broker-dealer operators of NMS Stock ATSs).
---------------------------------------------------------------------------

    Overall, the Commission preliminarily believes that the disclosures 
required under Part III, Item 5 of proposed Form ATS-N would be useful 
to many market participants. The Commission notes that market 
participants may vary widely in their decision making process in 
selecting a particular trading center to effect their trades or route 
their orders, and therefore, the Commission preliminarily believes that 
some market participants may not be concerned with the potential 
conflicts of interest posed by the trading activity of the broker 
dealer operator or its affiliates on the NMS Stock ATS. However, absent 
disclosure of this trading activity of the broker-dealer operator or 
its affiliates, subscribers and potential subscribers that take such 
information into account when executing their trading or investment 
strategies likely would neither be aware of such potential conflicts 
nor able to assess whether the conflicts might impact those strategies. 
Consequently, the Commission preliminary believes that it would be 
useful to market participants for an NMS Stock ATS to be required to 
disclose the information required in Part III, Item 5 of proposed Form 
ATS-N.
Request for Comment
    202. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 5 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    203. Do you believe Part III, Item 5 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the trading activity of the 
broker-dealer operator or its affiliates on the NMS Stock ATS? Why or 
why not? Please support your arguments.
    204. Do you believe that Part III, Item 5 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required relating to the broker-dealer operator and its affiliates 
trading on the NMS Stock ATS? If not, how should Part III, Item 5 of 
proposed Form ATS-N be revised to provide additional clarity? Please 
explain.
    205. Do you believe proposed disclosures in Part III, Item 5 of 
proposed Form ATS-N should be applied to the trading activity on the 
NMS Stock ATS of affiliates of the broker-dealer operator? Why or why 
not? Should disclosures of affiliates trading on the NMS Stock ATS be 
extended to more remote affiliates under a revised definition of 
``affiliate''? \410\ Should disclosures apply to a more limited set of 
affiliates? Why or why not? Please support your arguments.
---------------------------------------------------------------------------

    \410\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

    206. Do you believe that the Commission should enhance measures to 
prevent potential conflicts of interest posed by the broker-dealer 
operator or its affiliates trading on its own NMS Stock ATS, such as 
prohibiting proprietary trading by the broker-dealer operator or its 
affiliates on the NMS Stock ATS? If no, why? If yes, what measures 
should the Commission consider? Please explain in detail.
    207. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 5 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 5 of proposed Form ATS-N 
would have the potential to impact innovation or discourage broker-
dealer operators or their affiliates from trading on their own NMS 
Stock ATS? Why or why not? Would the proposed disclosures in Part III, 
Item 5 of proposed Form ATS-N require broker-dealer operators of NMS 
Stock ATSs to reveal too much (or not enough) information about their 
structure and operations? Why or why not? Please support your 
arguments.
    208. Do you believe there is other information that market 
participants might find relevant or useful regarding the trading 
activity on the NMS Stock ATS by the broker-dealer operator or its 
affiliates? If so, describe such information and explain whether, and 
if so why, such information should be required to be provided under 
proposed Form ATS-N. Please support your arguments.
    209. Do you believe there is any information regarding the trading 
activity on the NMS Stock ATS by the broker-dealer operator or its 
affiliates that the NMS Stock ATS should not be required to disclose on 
Form ATS-N due to concerns regarding confidentiality, business reasons, 
trade secrets, burden, or any other concerns? If so, what information 
and why? Please support your arguments.
    210. Should the Commission require separate disclosures for 
different types of trading conducted by the broker-dealer operator on 
the NMS Stock ATS, such as trading by the broker-dealer operator for 
the purpose of correcting error trades executed on the ATS, as compared 
to other types of proprietary trading? Why or why not? Please support 
your arguments. If so, what types of proprietary trading should be 
addressed separately and why? What disclosures should the Commission 
require about these types of proprietary trading and why? Please 
explain in detail.
    211. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
5 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 5?

[[Page 81052]]

7. Broker-Dealer Operator Smart Order Routers (or Similar 
Functionalities) and Algorithms
    Part III, Item 6 of proposed Form ATS-N would require the NMS Stock 
ATS to disclose whether the broker-dealer operator, or any of its 
affiliates, use a SOR(s) (or similar functionality), an algorithm(s), 
or both to send or receive subscriber orders or other trading interest 
to or from the NMS Stock ATS, and if so, to: (1) Identify the SOR(s) 
(or similar functionality) or algorithm(s) and identify the person(s) 
that operates the SOR(s) (or similar functionality) or algorithm(s), if 
other than the broker-dealer operator; \411\ and (2) describe the 
interaction or coordination between the identified SOR(s) (or similar 
functionality) or algorithm(s) and the NMS Stock ATS, including any 
information or messages about orders or other trading interest (e.g., 
IOIs) that the SOR(s) (or similar functionality) or algorithm(s) send 
or receive to or from the NMS Stock ATS and the circumstances under 
which such information may be shared with any person.
---------------------------------------------------------------------------

    \411\ See supra note 362.
---------------------------------------------------------------------------

    Today, most broker-dealers that operate an NMS Stock ATS use some 
form of SOR (or similar functionality) in connection with the NMS Stock 
ATS. A SOR (or similar functionality) can generally be understood as an 
automated system used to route orders or other trading interest among 
trading centers, including proprietary non-ATS trading centers operated 
by the broker-dealer operator, to carry out particular trading 
instructions or strategies of a broker-dealer. Smart order routers (or 
similar functionalities) have become an integral part of the business 
of many multi-service broker-dealers, given the increase in the speed 
of trading in today's equity markets and the large number of trading 
centers, including national securities exchanges, ATSs, and non-ATS 
trading centers, that have emerged since the adoption of Regulation 
ATS. In addition to the SOR (or similar functionality), orders or other 
trading interest may be entered on an NMS Stock ATS through the use of 
a trading algorithm, which is a computer assisted trading tool that, 
for instance, may be used by or on behalf of institutional investors to 
execute orders that are typically too large to be executed all at once 
without excessive price impact, and divide the orders into many small 
orders that are fed into the marketplace over time.\412\
---------------------------------------------------------------------------

    \412\ See Staff of the Division of Trading and Markets, 
Commission, ``Equity Market Structure Literature Review, Part II: 
High Frequency Trading,'' at 5 (March 18, 2014), http://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
---------------------------------------------------------------------------

    Broker-dealer operators of NMS Stock ATSs or their affiliates may 
use SORs (or similar functionality) or algorithms in a variety of 
ways.\413\ For example, the broker-dealer operator may use the SOR (or 
similar functionality) to route orders on behalf of its customers and 
proprietary trading desks to different trading venues, or the broker-
dealer operator may use the SOR as the primary means of routing 
subscriber orders or other trading interest to or from the NMS Stock 
ATS. The Commission understands, based on experience, that for some 
ATSs that currently transact in NMS stocks, the SOR (or similar 
functionality) or algorithm of the broker-dealer operator or its 
affiliates is the only means of access (i.e., all orders or other 
trading interest entered on, or removed from, the ATS, must pass 
through the SOR (or similar functionality) or algorithm). A broker-
dealer operator may also use a SOR (or similar functionality) or 
algorithm to handle all order flow received by the broker-dealer 
operator (or its affiliates), including both orders that a subscriber 
has specifically directed to the NMS Stock ATS and orders that may not 
be sent to the NMS Stock ATS, as well as the broker-dealer's own 
proprietary orders and those of its affiliates. For many orders, the 
SOR (or similar functionality) or algorithm determines whether to route 
the order to the NMS Stock ATS, another NMS Stock ATS or non-ATS 
trading center operated by the broker-dealer operator, another broker-
dealer, an unaffiliated NMS Stock ATS, or a national securities 
exchange. The SOR (or similar functionality) may obtain knowledge of 
subscriber orders or other trading interest that have been routed to 
the NMS Stock ATS (and may now be resting on the NMS Stock ATS) and 
subscriber orders that have been routed out of the NMS Stock ATS. 
Similarly, the system operating an algorithm used by the broker-dealer 
operator to enter subscriber orders based on the algorithm's trading 
strategy may obtain information about subscriber orders sent to the NMS 
Stock ATS. The broker-dealer operator (or its affiliates) programs and 
operates the SOR (or similar functionality) and/or algorithm(s), unless 
the broker-dealer operator contracts such functions to a third-party 
vendor, in which case the broker-dealer operator or third-party vendor 
may have access to information that passes through the SOR(s) (or 
similar functionality), algorithm(s) or both.
---------------------------------------------------------------------------

    \413\ The Commission notes that, similar to legacy NMS Stock 
ATSs, broker-dealer operators are likely to vary in their 
organizational structures. Accordingly, the Commission proposes to 
include affiliates of the broker-dealer operator that may operate a 
SOR(s) (or similar functionality) or algorithm(s) in Part III, Item 
6 of proposed Form ATS-N to ensure that SORs (or similar 
functionalities) or algorithms used in connection with the NMS Stock 
ATSs are disclosed regardless of whether the SOR(s) (or similar 
functionality) or algorithm(s) is operated by an affiliate of the 
broker-dealer operator.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the high likelihood that 
a SOR (or similar functionality) or algorithm could access subscribers' 
confidential trading information necessitates disclosure of certain 
information to subscribers about the use of a SOR (or similar 
functionality) or algorithm by the broker-dealer operator or its 
affiliates to route subscriber orders to or out of the NMS Stock ATS. 
The Commission preliminarily believes that subscribers and the 
Commission would benefit from increased disclosures about the use of a 
SOR(s) (or similar functionality) or algorithm(s) by the broker-dealer 
operator or its affiliates in connection with the NMS Stock ATS because 
of the potential for information leakage. Existing Form ATS does not 
specifically inquire about the use of a SOR (or similar functionality) 
or algorithms in connection with an ATS and based on Commission 
experience, the Commission is concerned that there is limited 
information available to subscribers about the interaction between SORs 
(or similar functionalities) or algorithms and affiliated ATSs that 
trade NMS stocks, despite the importance of SORs (or similar 
functionality) or algorithms to the functions and operations of such 
ATSs. The Commission preliminarily believes that information provided 
on Form ATS-N would allow market participants to better understand the 
operation of an NMS Stock ATS and the circumstances that may give rise 
to potential conflicts of interest and information leakage.
    Part III, Item 6(a) of proposed Form ATS-N would require an NMS 
Stock ATS to identify the SOR(s) (or similar functionality) or 
algorithm(s) and identify the person(s) that operates the SOR (or 
similar functionality) and algorithm(s). Part III, Item 6(a) of 
proposed Form ATS-N is designed to provide subscribers with information 
about who operates the SOR(s) (or similar functionality) or 
algorithm(s) used in connection with the NMS Stock ATS, which would 
thereby inform subscribers about who may have access to their 
confidential trading information or control over the entry and removal 
of orders or other trading interest to and

[[Page 81053]]

from the NMS Stock ATS. Information about the persons who operate a 
SOR(s) (or similar functionality) or algorithm(s) used in connection 
with the NMS Stock ATS and how the SOR(s) (or similar functionality) or 
algorithm(s) operates would allow subscribers to assess potential 
sources of information leakage and conflicts of interest that may arise 
from the operation of the SOR(s) (or similar functionality) and/or 
algorithm(s).
    Part III, Item 6(b) of proposed Form ATS-N would require an NMS 
Stock ATS to describe the interaction or coordination between the 
identified SOR(s) (or similar functionality) or algorithm(s) and the 
NMS Stock ATS, including any information or messages about orders or 
other trading interest (e.g., IOIs) that the SOR(s) (or similar 
functionality) or algorithm(s) send or receive to or from the NMS Stock 
ATS and the circumstances under which such information may be shared 
with any person. Because the SOR(s) (or similar functionality) or 
algorithm(s) and NMS Stock ATS are typically operated by the same 
broker-dealer operator (rather than a third-party vendor), the 
Commission preliminarily believes subscribers to the NMS Stock ATS are 
likely to find it important to understand what information about their 
orders is obtained by a SOR(s) (or similar functionality) or 
algorithm(s) and the circumstances under which that information may be 
used by the broker-dealer operator of the NMS Stock ATS, its 
affiliates, or other persons. The Commission is concerned that without 
this information, subscribers that send orders to the NMS Stock ATS by 
way of the broker-dealer operator's SOR (or similar functionality) or 
algorithm may not be able to understand the conditions under which 
information about their confidential trading information may be leaked.
    The interaction or coordination of the SOR(s) (or similar 
functionality) or algorithm(s) with the NMS Stock ATS likely varies 
across NMS Stock ATSs. For instance, a SOR (or similar functionality) 
or algorithm may check for potential contra-side interest in a 
particular symbol on the NMS Stock ATS prior to sending the subscriber 
order or other trading interest into the NMS Stock ATS. Such protocol 
carried out by the SOR (or similar functionality) or algorithm may send 
only information about the symbol and side (i.e., buy or sell) of the 
subscriber's order or other trading interest, but not the size, price, 
identity of the subscriber or other information. As another example, an 
NMS Stock ATS that uses IOIs as part of its platform may use its SOR 
(or similar functionality) or an algorithm to facilitate the sending of 
IOIs to relevant persons regarding orders or other trading interest 
resting on the NMS Stock ATS. The Commission preliminarily believes 
that the operations and functions of the SOR(s) (or similar 
functionality) or algorithm(s) in these examples would be relevant to 
subscribers and helpful in understanding how the NMS Stock ATS 
operates.
    The Commission notes that an ATS may consist of various 
functionalities or mechanisms that operate collectively as a Rule 3b-16 
system to bring together the orders for securities of multiple buyers 
and sellers using non-discretionary methods.\414\ Based on Commission 
experience, most broker-dealer operators that use a SOR(s) (or similar 
functionality) or algorithm operate the SOR(s) (or similar 
functionality) or algorithm(s) separate and apart from their ATS. 
However, to the extent that a SOR (or similar functionality) or 
algorithm operates jointly with, or performs a function of, the NMS 
Stock ATS to bring together the orders for securities of multiple 
buyers and sellers using established nondiscretionary methods, the SOR 
(or similar functionality) or algorithm may be considered part of the 
NMS Stock ATS.\415\ For example, a SOR (or similar functionality) or 
algorithm that is, based on the facts and circumstances, the exclusive 
means for subscribers to access and enter orders or other trading 
interest on NMS Stock ATS for execution would be regarded as part of 
the operations of the NMS Stock ATS because the SOR (or similar 
functionality) or algorithm would function as the mechanism for orders 
or other trading interest to be brought together and interact in the 
NMS Stock ATS. The Commission preliminarily believes that information 
provided on proposed Form ATS-N about the use of a SOR (or similar 
functionality) or algorithm under Part III, Item 6 of proposed Form 
ATS-N would allow the Commission to better understand the operations 
and scope of the NMS Stock ATS. That is, the proposed disclosures would 
assist the Commission in determining if a SOR (or similar 
functionality) or algorithm is facilitating the bringing together of 
orders for securities of multiple buyers and sellers using established 
nondiscretionary methods, and would consequently be part of the NMS 
Stock ATS for the purposes of Regulation ATS.
---------------------------------------------------------------------------

    \414\ Under Rule 3b-16 an organization, association, or group of 
persons shall be considered to constitute, maintain, or provide ``a 
market place or facilities for bringing together purchasers and 
sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange,'' 
if such organization, association, or group of persons: (1) Brings 
together the orders for securities of multiple buyers and sellers; 
and (2) uses established, non-discretionary methods (whether by 
providing a trading facility or by setting rules) under which such 
orders interact with each other, and the buyers and sellers entering 
such orders agree to the terms of a trade. 17 CFR 240.3b-16(a).
    \415\ The Commission noted in adopting Regulation ATS that the 
Commission ``will attribute the activities of a trading facility to 
a system if that facility is offered by the system directly or 
indirectly'' and ``if an organization arranges for separate entities 
to provide different pieces of a trading system, which together meet 
the definition contained in paragraph (a) of Rule 3b-16, the 
organization responsible for arranging the collective efforts will 
be deemed to have established a trading facility.'' See Regulation 
ATS Adopting Release, supra note 7, at 70852. If the SOR(s) (or 
similar functionality) or algorithm(s) were operated by an affiliate 
of the NMS Stock ATS or an entity unaffiliated with the NMS Stock 
ATS, the SOR(s) (or similar functionality) or algorithm(s) could 
still be considered a part of the NMS Stock ATS depending on the 
facts and circumstances.
---------------------------------------------------------------------------

Request for Comment
    212. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 6 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    213. Do you believe Part III, Item 6 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding the use of a SOR or algorithm 
by the broker-dealer operators, or any of its affiliates, to send or 
receive subscriber orders or other trading interest to or from the NMS 
Stock ATS? Why or why not? Please support your arguments.
    214. Do you believe that Part III, Item 6 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required relating to the broker-dealer operator and its affiliates' use 
of SORs (or similar functionality) and algorithms in connection with 
the NMS Stock ATS? If not, how should Part III, Item 6 of proposed Form 
ATS-N be revised to provide additional clarity? Please explain in 
detail.
    215. Do you believe it is appropriate for the Commission to require 
disclosure about the use of SORs (or similar functionalities) and 
algorithms by the broker-dealer operator, or its affiliates, to send or 
receive orders or other trading interest to or from the NMS Stock ATS? 
Why or why not? Please support your arguments. If so, what level of 
detail should be disclosed about how SORs (or similar functionalities) 
and algorithms determine whether to send or receive

[[Page 81054]]

orders or other trading interest to the NMS Stock ATS? Please be 
specific.
    216. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 6 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 6 of proposed Form ATS-N 
would have the potential to impact innovation? Why or why not? Would 
the proposed disclosures in Part III, Item 6 of proposed Form ATS-N 
require broker-dealer operators of NMS Stock ATSs to reveal too much 
(or not enough) about their structure and operations? Why or why not? 
Please support your arguments.
    217. Do you believe the proposed disclosures in Part III, Item 6 of 
proposed Form ATS-N related to the use of SORs (or similar 
functionality) and algorithms should be applied to affiliates of the 
broker-dealer operator? Why or why not? Please support your arguments.
    218. Do you believe there is other information that market 
participants might find relevant or useful regarding broker-dealer 
operators or their affiliates' SORs (or similar functionalities) and 
algorithms? If so, describe such information and explain whether, and 
if so why, such information should be required to be provided under 
proposed Form ATS-N. Please support your arguments.
    219. Do you believe there is any information regarding broker-
dealer operators or their affiliates' SORs (or similar functionality) 
and algorithms that the NMS Stock ATS should not be required to 
disclose on proposed Form ATS-N due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    220. Do you believe that most subscribers to ATSs that transact in 
NMS stock access the ATSs through the SOR (or similar functionality) or 
algorithm of the broker-dealer operator (or its affiliates), or do they 
connect directly to the ATS through some other means, or both? Please 
explain in detail.
    221. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
6 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 6?
8. Shared Employees of NMS Stock ATS
    Part III, Item 7 of proposed Form ATS-N would require an NMS Stock 
ATS to state whether any employee of the broker-dealer operator that 
services the operations of the NMS Stock ATS also services any other 
business unit(s) of the broker-dealer operator or any affiliate(s) of 
the broker-dealer operator (``shared employee'') and, if so, to (1) 
identify the business unit(s) and/or the affiliate(s) of the broker-
dealer operator to which the shared employee(s) provides services and 
identify the position(s) or title(s) that the shared employee(s) holds 
in the business unit(s) and/or affiliate(s) of the broker-dealer 
operator; and (2) describe the roles and responsibilities of the shared 
employee(s) at the NMS Stock ATS and the business unit(s) and/or 
affiliate(s) of the broker-dealer operator.\416\
---------------------------------------------------------------------------

    \416\ See Part III, Item 7 of proposed Form ATS-N.
---------------------------------------------------------------------------

    Part III, Item 7 of proposed Form ATS-N is designed to provide 
information to market participants and the Commission about 
circumstances that might give rise to a potential conflict of interest 
and potential information leakage involving shared employees of the 
broker-dealer operator. Responses to Part III, Item 7 of proposed Form 
ATS-N would require an NMS Stock ATS to describe the roles and 
responsibilities of the shared employees with the NMS Stock ATS and the 
other business units of the broker-dealer operator or affiliates. 
Responses to Part III, Item 7 of proposed Form ATS-N would be required 
to be sufficiently detailed to provide a comprehensive understanding of 
the full range of the shared employee's responsibilities with the NMS 
Stock ATS and each relevant entity, and include disclosure of 
responsibilities that could enable the employee to view subscribers' 
confidential trading information. The Commission preliminarily believes 
that market participants would find information about the multiple 
roles or functions of shared employees disclosed in Part III, Item 7 of 
proposed Form ATS-N important in evaluating whether to route orders to 
a particular ATS. For example, to identify and understand potential 
sources of information leakage, market participants would likely want 
to know if an employee of the broker-dealer operator that is 
responsible for the operations of a system supporting the NMS Stock ATS 
is also responsible for the proprietary trading activity of an 
affiliate of the broker-dealer operator that trades on the NMS Stock 
ATS. In this example, market participants might also be interested in 
understanding conflicts of interest that may result from the shared 
employee performing multiple roles, as the shared employee could have 
an incentive to alter the operations of the NMS Stock ATS to benefit 
the broker-dealer operator or an affiliate of the NMS Stock ATS.\417\
---------------------------------------------------------------------------

    \417\ The Commission notes that a broker-dealer operator may 
have valid business reasons for it or its affiliates having shared 
employees, and the Commission is not proposing to limit the ability 
for a broker-dealer operator to have such arrangements.
---------------------------------------------------------------------------

    The Commission would preliminarily view any personnel that service 
the trading functions of the NMS Stock ATS, such as those performing 
information technology, programming, testing, or system design 
functions as employees that ``service the operations of the NMS Stock 
ATS.'' Other employees of the NMS Stock ATS that are otherwise 
necessary for the trading functions of the NMS Stock ATS would also be 
included in the disclosure requirement of Part III, Item 7 of proposed 
Form ATS-N. Clerical employees or those performing solely 
administrative duties such as the payroll functions for the employees 
of the NMS Stock ATS would preliminarily not be included within the 
proposed disclosure.
Request for Comment
    222. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 7 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    223. Do you believe Part III, Item 7 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to ``shared employees''? Why or 
why not? Please support your arguments.
    224. Do you believe that Part III, Item 7 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required relating to shared employees of the broker-dealer operator? If 
not, how should Part III, Item 7 of proposed Form ATS-N be revised to 
provide additional clarity? Please explain.
    225. Do you believe that it is sufficiently clear who would be 
considered a ``shared employee'' under Part III, Item 7 of proposed 
Form ATS-N? Why or why not? Is the scope of ``shared employees'' 
provided under Part III, Item 7 reasonable? Why or why not? Please 
explain.
    226. Do you believe there is any information contained in the 
proposed disclosures in Part III, Item 7 of proposed Form ATS-N 
regarding shared employees of the broker-dealer operator that the NMS 
Stock ATS should not be required to disclose on proposed Form ATS-N due 
to concerns regarding confidentiality, business reasons, trade

[[Page 81055]]

secrets, burden, or any other concerns? If so, what information and 
why? Please support your arguments.
    227. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 7 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 7 of proposed Form ATS-N 
would have the potential to impact innovation or the manner in which 
NMS Stock ATSs and broker-dealer operators use their employees? Why or 
why not? Would the proposed disclosures in Part III, Item 7 of proposed 
Form ATS-N require broker-dealer operators of NMS Stock ATSs to reveal 
too much (or not enough) information about their structure and 
operations? Why or why not? Please support your arguments.
    228. Do you believe there is other information that market 
participants might find relevant or useful regarding shared employees 
of the broker-dealer operator? If so, describe such information and 
explain whether, and if so why, such information should be required to 
be provided under proposed Form ATS-N. Please support your arguments.
    229. Do you believe that the Commission should expand the proposed 
disclosures in Part III, Item 7 of proposed Form ATS-N to other 
employees, personnel, or independent contractors of the broker-dealer 
operator? Why or why not? If so, which employees, personnel, or 
independent contractors should be included and what information about 
such persons should be solicited? Please explain.
    230. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
7 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 7?
9. Service Providers to the NMS Stock ATS
    Part III, Item 8 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether any operation, service, or function of the NMS 
Stock ATS is performed by any person(s) other than the broker-dealer 
operator of the NMS Stock ATS, and if so to: (1) Identify the person(s) 
(in the case of a natural person, to identify only the position or 
title) performing the operation, service, or function and note whether 
this service provider(s) is an affiliate of the broker-dealer, if 
applicable; (2) describe the operation, service, or function that the 
identified person(s) provides and describe the role and 
responsibilities of that person(s); and (3) state whether the 
identified person(s), or any of its affiliates, may enter orders or 
other trading interest on the NMS Stock ATS and, if so, describe the 
circumstances and means by which such orders or other trading interest 
are entered on the NMS Stock ATS.\418\
---------------------------------------------------------------------------

    \418\ See Part III, Item 8 of proposed Form ATS-N.
---------------------------------------------------------------------------

    The Commission notes that Part III, Item 8 of proposed Form ATS-N 
expands on the disclosure requirements of Exhibit E on current Form 
ATS, which requires ATSs to disclose the name of any entity other than 
the ATS that will be involved in the operation of the ATS, including 
the execution, trading, clearing and settling of transactions on behalf 
of the ATS; and to provide a description of the role and 
responsibilities of each entity.\419\ Part III, Item 8 of proposed Form 
ATS-N would require more detailed information about service providers 
to the NMS Stock ATS than is currently required by Form ATS, including 
whether affiliates of service providers may trade on the NMS Stock 
ATS.\420\
---------------------------------------------------------------------------

    \419\ See Item 7 of Form ATS (describing the requirements for 
Exhibit E to Form ATS).
    \420\ The Commission notes that a broker-dealer operator may 
have valid business reasons for it or its affiliates to have 
functions of the NMS Stock ATS performed by person(s) other than the 
broker-dealer operator of the NMS Stock ATS. The Commission is not 
proposing to limit the ability for a broker-dealer operator to have 
such arrangements.
---------------------------------------------------------------------------

    Under Part III, Item 8(a) of proposed Form ATS-N, the NMS Stock-ATS 
must identify any entity that performs any operation, service, or 
function for the NMS Stock ATS.\421\ For example, an NMS Stock ATS may 
engage a third-party service provider to provide market data for the 
NMS Stock ATS to, among other things, calculate reference prices (such 
as the NBBO). Responses to Part III, Item 8(a) of proposed Form ATS-N 
would be required to include the name of the company that provides the 
market data. Part III, Item 8(b) of proposed Form ATS-N would require 
an NMS Stock ATS to provide, in detail, information about the 
operations, service, or function of the NMS Stock ATS that is provided 
by the identified third-party in Part III, Item 8(a) of proposed Form 
ATS-N and its roles and responsibilities with respect to that 
operation, service, or function. For example, a broker-dealer operator 
may engage a third party to host and maintain the trading platform of 
the NMS Stock ATS. Part III, Item 8(b) of proposed Form ATS-N would 
require a description of those services and the specific role and 
responsibilities of the company and its employees. Responses to Part 
III, Item 8(b) of proposed Form ATS-N would be required to be 
sufficiently detailed such that market participants and the Commission 
could understand what functions are performed by a person other than an 
employee of the broker-dealer operator and what those services include. 
As guidance for completing this proposed disclosure item, the 
Commission would view an NMS Stock ATS simply stating that a third-
party provides technology or hardware services to the NMS Stock ATS as 
not sufficiently responsive to the required disclosure. Responses to 
Part III, Item 8(b) of proposed Form ATS-N, in the example above, would 
require a detailed description of information technology services, 
including both hardware and software that may be provided, as well as 
any programming, ongoing maintenance, monitoring, and other functions 
the service provider would perform with respect to the NMS Stock ATS. 
As additional guidance, responses to Item 8 would also be required to 
include any service provider that provides, for example, such functions 
as consulting relating to the trading systems or functionality, cyber 
security, regulatory compliance, and record keeping services or 
functions of the NMS Stock ATS. Additionally, an NMS Stock ATS would be 
required to identify and describe the services of any service provider 
engaged for the purposes of the clearance and settlement of trades for 
the NMS Stock ATS.\422\
---------------------------------------------------------------------------

    \421\ The Commission is not proposing to require than an NMS 
Stock ATS provide any personally identifiable information about any 
natural person in Part III, Item 8(a) of proposed Form ATS-N. Part 
III, Item 8(a) of proposed Form ATS-N is designed to solicit 
sufficient information to identify the entity or person providing 
the service, operation, or function to the NMS Stock ATS, such as 
the position or title in the case of a natural person acting as a 
service provider.
    \422\ The Commission notes that the examples listed above are 
not intended to be an exhaustive list of the types of services, and 
the level of detail about those services, that would be required by 
Part III, Item 8 of proposed Form ATS-N. The Commission 
preliminarily believes that the appropriate disclosure would be 
driven by the particular facts and circumstances of operational 
structure of the NMS Stock ATS.
---------------------------------------------------------------------------

    The Commission intends that the proposed disclosure requirements of 
Items 8(a) and (b) of Part III of proposed Form ATS-N would apply to 
any operation, service, or function performed by any person outside of 
the NMS Stock ATS entity, including affiliates of the broker-dealer 
operator.\423\ However, services provided

[[Page 81056]]

to the NMS Stock ATS by employees of the broker-dealer operator would 
not need to be disclosed in Part III, Item 8 of proposed Form ATS-N. 
The activities of such persons, to the extent they are shared 
employees, would be disclosed pursuant to Part III, Item 7 of proposed 
Form ATS-N.\424\ The Commission also notes that it does not intend that 
the proposed disclosure requirements of Part III, Item 8 of proposed 
Form ATS-N would extend to operations, services, or functions that are 
administrative in nature and do not pose a significant risk of 
information leakage of confidential trading information, such as 
payroll functions servicing employees of the NMS Stock ATS or email 
services provided by an outside provider, because the Commission 
preliminarily believes that information about the services of such 
third-party services providers and their employees would not be 
relevant to market participants' evaluation of an NMS Stock ATS as a 
trading venue and would not be necessary for the Commission's oversight 
functions.
---------------------------------------------------------------------------

    \423\ If, for example, the SOR of an affiliate of the broker-
dealer operator is used to route orders to and from the NMS Stock 
ATS, the SOR would need to be disclosed in Part III, Item 8 of 
proposed Form ATS-N and would likely also need to be disclosed in 
Part III, Item 6 of proposed Form ATS-N, which relates to SORs used 
by the broker-dealer operator or its affiliates.
    \424\ See supra Section VII.B.8 (discussing proposed 
requirements for disclosure pertaining to NMS Stock ATS employees 
that are shared employees with other business units of the broker-
dealer operator or its affiliates).
---------------------------------------------------------------------------

    Items 8(a) and (b) of Part III of proposed Form ATS-N are designed 
to provide market participants and the Commission with information 
about how the NMS Stock ATS operates, potential conflicts of interest, 
and the potential for information leakage. In particular, the 
Commission preliminarily believes that this information would inform 
market participants, as well as the Commission, about what aspects of 
the NMS Stock ATS's operations are performed by third-parties that may 
or may not be under the control of the broker-dealer operator. For 
example, an NMS Stock ATS whose trading system is operated or supported 
by a third-party service provider may have business interests that are 
aligned with those of the service provider. Additionally, depending on 
the role and responsibilities of the third-party service provider, 
market participants may want to evaluate the robustness of the NMS 
Stock ATS's safeguards and procedures to protect confidential 
subscriber information.
    Lastly, Part III, Item 8(c) of proposed Form ATS-N would require an 
NMS Stock ATS to state whether any person identified in Part III, Item 
8(a) of proposed Form ATS-N or any of its affiliates may enter orders 
or other trading interest on the NMS Stock ATS and if so, to describe 
the circumstances and means by which such orders or other trading 
interests are entered on the NMS Stock ATS. The purpose of these 
disclosures is to provide market participants and the Commission with 
information about the potential for conflicts of interest that may 
result from a service provider, or its affiliates, trading on the NMS 
Stock ATS and the potential for information leakage. For example, the 
Commission preliminarily believes that a subscriber or potential 
subscriber likely would want to know whether a person that is not an 
employee of the broker-dealer operator, but is contracted to service 
the trading platform that contains the NMS Stock ATS's book of orders, 
could enter orders or other trading interest on the NMS Stock ATS. 
Similarly, the Commission preliminarily believes that a subscriber or a 
potential subscriber would also want to know whether an affiliate of 
the service provider could enter orders or other trading interest on 
the NMS Stock ATS as well and whether its means of access differ from 
other subscribers. Under both of these scenarios, a potential conflict 
of interest could result if the service provider has business interests 
that compete with the trading interests of other subscribers to the NMS 
Stock ATS.
Request for Comment
    231. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 8 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    232. Do you believe Part III, Item 8 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding any operation, service, or 
function of the NMS Stock ATS performed by any person other than the 
broker-dealer operator? Why or why not? Please support your arguments.
    233. Do you believe that Part III, Item 8 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required relating to service providers of the NMS Stock ATS? If not, 
how should Part III, Item 8 of proposed Form ATS-N be revised to 
provide additional clarity? Please explain.
    234. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 8 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 8 of proposed Form ATS-N 
would have the potential to impact innovation or discourage 
arrangements with other service providers? Why or why not? Would the 
proposed disclosures in Part III, Item 8 of proposed Form ATS-N require 
broker-dealer operators of NMS Stock ATSs to reveal too much (or not 
enough) information about their structure and operations? Why or why 
not? Please support your arguments.
    235. Do you believe that any of the information in the proposed 
disclosure requirements of Part III, Item 8 of proposed Form ATS-N 
regarding service providers to the NMS Stock ATS should not be required 
to be disclosed on proposed Form ATS-N due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    236. Do you believe the Commission should adopt a more limited or 
expansive definition of ``affiliate'' for purposes of this disclosure 
item? Why or why not? Please support your arguments.
    237. Do you believe there is other information that market 
participants might find relevant or useful regarding any operation, 
service, or function of the NMS Stock ATS performed by any person other 
than the broker-dealer operator? If so, describe such information and 
explain whether, and if so why, such information should be required to 
be provided under proposed Form ATS-N. Please support your arguments.
    238. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
8 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 8?
10. Differences in Availability of Services, Functionality, or 
Procedures
    Part III, Item 9 of proposed Form ATS-N would require an NMS Stock 
ATS to identify and describe any service, functionality, or procedure 
of the NMS Stock ATS that is available or applies to the broker-dealer 
operator or its affiliates, that is not available or does not apply to 
a subscriber(s) to the NMS Stock ATS. The purpose of this disclosure is 
to alert market participants to the existence of system, functionality, 
or trading features that the broker-dealer operator or its affiliates 
may have that

[[Page 81057]]

other subscribers do not.\425\ For example, an NMS Stock ATS may employ 
different procedures governing how orders entered on the NMS Stock ATS 
by the broker-dealer operator's business units or affiliates are 
segmented than it does for other subscribers. The Commission 
preliminarily believes that the disclosure of those differences in 
procedures would allow market participants to evaluate whether such 
differences might put them at a disadvantage when competing against the 
broker-dealer operator or its affiliates for an execution on the NMS 
Stock ATS and thus, better enable market participants to decide whether 
submitting order flow to that NMS Stock ATS aligns with their trading 
or investment objectives.
---------------------------------------------------------------------------

    \425\ The Commission notes that it is similarly proposing to 
require NMS Stock ATSs to disclose differences in the treatment of 
subscribers on the NMS Stock ATS in a number of proposed disclosure 
requirements. See, e.g., proposed Items 1(a) and 1(b) of Part IV of 
proposed Form ATS-N.
---------------------------------------------------------------------------

    The Commission notes that a significant difference between national 
securities exchanges and NMS Stock ATSs is the extent to which each 
trading center allows access to its services by its users. Section 
6(b)(2) of the Exchange Act generally requires registered national 
securities exchanges to allow any qualified and registered broker-
dealer to become a member of the exchange--a key element in assuring 
fair access to national securities exchange services.\426\ In contrast, 
the access requirements that apply to ATSs are much more limited. 
Because NMS Stock ATSs are exempt from the definition of an 
``exchange'' so long as they comply with Regulation ATS, and thus, are 
not required to register as a national securities exchange pursuant to 
Sections 5 and 6 of the Exchange Act, NMS Stock ATSs are not required 
to provide fair access unless they reach a 5% trading volume threshold 
in a stock, which almost all NMS Stock ATSs currently do not.\427\ As a 
result, access to the services of NMS Stock ATSs is determined 
primarily by private negotiation, and such access to services can 
differ among persons that subscribe to the NMS Stock ATS.
---------------------------------------------------------------------------

    \426\ 15 U.S.C. 78f(b)(2).
    \427\ See 17 CFR 242.301(b)(5). See also supra notes 92-95 and 
accompanying text (discussing the fair access requirements of 
Regulation ATS).
---------------------------------------------------------------------------

    While the Commission is not proposing to change the fair access 
requirements applicable to NMS Stock ATSs in this proposal, the 
Commission is proposing to require, among other things, disclosures on 
Form ATS-N that identify and describe differences among subscribers (or 
other persons) in the services, procedures or functionalities that an 
NMS Stock ATS provides, as well as disclosures that identify and 
describe any services, functionalities, or procedures of an NMS Stock 
ATS that are available to the broker-dealer operator's affiliates, but 
are not available to subscribers. The Commission preliminarily believes 
that the disclosure of these differences would allow market 
participants to evaluate whether such differences might put them at a 
disadvantage when trading on a particular NMS Stock ATS and thus, 
better enable market participants to decide whether submitting order 
flow to that NMS Stock ATS aligns with their trading or investment 
objectives.
    The Commission notes that ATSs may treat subscribers differently 
with respect to the services offered by the ATS unless prohibited by 
applicable federal securities laws or the rules and regulations 
thereunder. For example, an ATS with at least 5% of the average daily 
volume for any covered security during four of the preceding six months 
is required to comply with fair access requirements under Rule 
301(b)(5) of Regulation ATS,\428\ which, among other things, requires 
an ATS to establish written standards for granting access to trading on 
its system and not unreasonably prohibiting or limiting any person with 
respect to access to services offered by the ATS by applying the 
written standards in an unfair or discriminatory manner. Thus, for 
example, an ATS that discloses a service to one class of subscribers 
(or makes the associated functionality available to only one class of 
subscribers) could not, if it were subject to the fair access 
requirements, discriminate in this manner unless it had fair and non-
discriminatory reasons for doing so. The Commission further notes that, 
even if an ATS is not subject to the fair access requirements, 
inaccurate or misleading disclosures about an ATS's operations could 
result in violations of the antifraud provisions of the federal 
securities laws.\429\
---------------------------------------------------------------------------

    \428\ See id.
    \429\ See, e.g., UBS Settlement at 14, ITG Settlement at 15, 
Pipeline Settlement at 16, and Liquidnet Settlement at 14, supra 
note 374 (all noting violations of Section 17(a)(2) of the 
Securities Act, which prohibits, directly or indirectly, in the 
offer or sale of securities, obtaining money or property by means of 
any untrue statement of a material fact or any omission to state a 
material fact necessary in order to make the statements made, in 
light of the circumstances under which they were made, not 
misleading.) 15 U.S.C. 77q(a)(2).
---------------------------------------------------------------------------

Request for Comment
    239. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 9 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    240. Do you believe Part III, Item 9 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to any service, functionality, 
or procedure of the NMS Stock ATS that is available or applies to the 
broker-dealer operator or its affiliates, that is not available or does 
not apply to a subscriber(s) to the NMS Stock ATS? Why or why not? 
Please support your arguments.
    241. Do you believe there is other information that market 
participants might find relevant or useful regarding any service, 
functionality, or procedure of the NMS Stock ATS that is available or 
applies to the broker-dealer operator or its affiliates, that is not 
available or does not apply to a subscriber(s) to the NMS Stock ATS? If 
so, describe such information and explain whether, and if so why, such 
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
    242. Do you believe that Part III, Item 9 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required relating to the differences in services provided to the 
broker-dealer operator or its affiliates trading on the NMS Stock ATS? 
If not, how should Part III, Item 9 of proposed Form ATS-N be revised 
to provide additional clarity? Please explain.
    243. Do you believe that the proposed disclosures in Part III, Item 
9 of proposed Form ATS-N that are intended to cover differences in 
services, functionalities, or procedures should be applied to 
affiliates of the broker-dealer operator? Why or why not? Conversely, 
should such disclosures be extended to more remote affiliates under a 
revised definition of ``affiliate''? \430\ Should disclosure apply to a 
more limited set of affiliates? Why or why not? Please support your 
arguments.
---------------------------------------------------------------------------

    \430\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

    244. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 9 of proposed Form ATS-N? Do you 
believe the disclosures in Part III, Item 9 of proposed Form ATS-N 
would have the potential to impact innovation? Why or why not? Would 
the proposed disclosures in Part III, Item 9 of proposed Form ATS-N 
require broker-dealer operators of NMS Stock ATSs to

[[Page 81058]]

reveal too much (or not enough) information about their structure and 
operations? Why or why not? Please support your arguments.
    245. Do you believe there is any information regarding differences 
in services, functionalities, or procedures of the NMS Stock ATS that 
are available to the broker-dealer operator or its affiliates and not 
other subscribers that should not be required disclosures on Form ATS-N 
due to concerns regarding confidentiality, business reasons, trade 
secrets, burden, or any other concerns? If so, what information and 
why? Please support your arguments.
    246. Do you believe that the Commission should propose amendments 
to Rule 301(b)(5) of Regulation ATS to lower the trading volume 
threshold in Regulation ATS that triggers the fair access requirement 
from its current 5%? If so, what is the appropriate threshold? Please 
support your arguments.
    247. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
9 of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part III, Item 9?
11. Confidential Treatment of Trading Information
    Part III, Item 10 of proposed Form ATS-N is based on the 
requirements of Rule 301(b)(10) of Regulation ATS,\431\ and would 
require an NMS Stock ATS to describe the written safeguards and written 
procedures to protect the confidential trading information of 
subscribers to the NMS Stock ATS. It would also require an NMS Stock 
ATS to: (a) Describe the means by which a subscriber can consent or 
withdraw consent to the disclosure of confidential trading information 
to any persons (including the broker-dealer operator and any of its 
affiliates); (b) identify the positions or titles of any persons that 
have access to the confidential trading information, describe the 
confidential trading information to which the persons have access, and 
describe the circumstances under which the persons can access 
confidential trading information; (c) describe the written standards 
controlling employees of the NMS Stock ATS trading for the employees' 
accounts; and (d) describe the written oversight procedures to ensure 
that the safeguards and procedures described above are implemented and 
followed.
---------------------------------------------------------------------------

    \431\ 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

    As previously noted,\432\ the Commission stated when adopting 
Regulation ATS that Rule 301(b)(10) did not preclude a broker-dealer 
that operated an ATS from engaging in other broker-dealer functions. 
However, to prevent the misuse of private subscriber and customer 
trading information for the benefit of other customers or activities of 
the broker-dealer operator, the Commission required that ATSs have in 
place safeguards and procedures to protect that confidential trading 
information and to separate ATS functions from other broker-dealer 
functions.\433\ In adopting Rule 301(b)(10), the Commission stated that 
the rule was meant to ensure that information, such as the identity of 
subscribers and their orders, be available only to those employees of 
the alternative trading system who operate the system or are 
responsible for its compliance with applicable rules.\434\ Thus, a 
broker-dealer operator may not convert confidential trading information 
of ATS subscribers for use by the non-ATS business units operated by 
the broker-dealer.
---------------------------------------------------------------------------

    \432\ See infra Sections IX and X (discussing the requirements 
of Rule 301(b)(10) and proposed amendments to require that 
safeguards and procedures be written and preserved).
    \433\ See Regulation ATS Adopting Release, supra note 7, at 
70879.
    \434\ Id.
---------------------------------------------------------------------------

    The protection of subscribers' confidential trading information 
remains a bedrock component of the regulation of ATSs, including those 
that trade NMS stocks, and is essential to ensuring the integrity of 
ATSs as execution venues. To the extent that subscribers cannot be 
assured that their confidential trading information will be protected 
by an ATS, many of the advantages or purposes for which a subscriber 
may choose to send its orders to an ATS (e.g., trade anonymously and/or 
to mitigate the impact of trading large positions) \435\ are 
eliminated. Moreover, if subscribers' confidential trading information 
is shared without subscribers' consent, that information may be used by 
the recipient of the information to gain a competitive advantage over 
the subscriber. In cases where the confidential trading information of 
a subscriber is impermissibly shared with the personnel of the broker-
dealer operator or any of its affiliates (i.e., persons who are not 
responsible for the operation of the ATS or compliance with applicable 
rules), such an abuse is compounded by the conflicting interests of the 
broker-dealer operator. That is, in such a case, the broker-dealer 
operator has invited subscribers to trade on its ATS and may have 
abused that relationship to provide itself or its affiliates with a 
direct competitive advantage over that subscriber. The Commission 
preliminarily believes that disclosure is necessary in this area so 
market participants can independently evaluate the robustness of the 
safeguards and procedures that are employed by the NMS Stock ATS to 
protect subscriber confidential trading information and decide for 
themselves whether they wish to do business with a particular NMS Stock 
ATS.
---------------------------------------------------------------------------

    \435\ See id. (stating that many of the ATSs popular at the time 
Regulation ATS was adopted were anonymous and that many ECNs at that 
time were popular because they permitted wide dissemination of 
orders but provided anonymity).
---------------------------------------------------------------------------

    Part III, Item 10(a) of proposed Form ATS-N would require the NMS 
Stock ATS to describe the means by which a subscriber can consent or 
withdraw consent to the disclosure of confidential trading information 
to any persons (including the broker-dealer operator and any of its 
affiliates). Disclosing the means by which a subscriber can consent or 
withdraw consent from the sharing of such information would allow 
subscribers and potential subscribers to understand what information 
about their orders or other trading interest will be kept confidential 
and how they can specify the means by which they choose to share 
confidential information. As the Commission noted in the adoption of 
Regulation ATS, subscribers should be able to give consent if they so 
choose to share their confidential trading information.\436\ ATSs that 
transact in NMS stocks vary in terms of what types of orders, 
indications of interests, or other forms of trading interest are 
confidential on their systems and what specific information about such 
trading interest may be shared. For example, an ATS might provide that 
no IOIs submitted by subscribers will be considered confidential, but 
may provide subscribers with the option to restrict the information in 
the IOI message to just the symbol and side (i.e., buy or sell). In 
this example, responses to Item 10(a) would require an NMS Stock ATS to 
describe the means by which a subscriber or potential subscriber could 
control some of the information contained in the IOI message by 
providing consent or withdrawing such consent for the sharing of its 
confidential trading information.\437\
---------------------------------------------------------------------------

    \436\ See Regulation ATS Adopting Release, supra note 7, at 
70879.
    \437\ The Commission notes that there may be some NMS Stock ATSs 
that might not offer any means by which a subscriber could consent 
to the dissemination of its confidential trading information. An NMS 
Stock ATS would be required to disclose this fact pursuant to Item 
9(a).

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

[[Page 81059]]

    Part III, Item 10(b) of proposed Form ATS-N, which would require 
that ATSs identify any person that has access to confidential trading 
information, the type of information, and the circumstances under which 
they may access such information, is meant to provide transparency into 
the potential sources from which confidential trading information might 
be compromised. As noted above, Regulation ATS requires that access to 
confidential subscriber information be available only to those 
employees of the ATS that operate the system or are responsible for the 
ATS's compliance with applicable rules.\438\ The Commission 
preliminarily believes that requiring ATSs to disclose the list by 
title or position of all personnel that can access the confidential 
trading information of subscribers would buttress the existing 
obligations on ATSs to restrict access only to permitted personnel 
(i.e., those responsible for its operation or compliance).
---------------------------------------------------------------------------

    \438\ See Regulation ATS Adopting Release, supra note 7, at 
70879; 17 CFR 242.301(b)(10)(i)(A).
---------------------------------------------------------------------------

    Part III, Item 10(b) of proposed Form ATS-N would also require the 
NMS Stock ATS to describe the confidential trading information that may 
be accessed by permitted persons. For example, employees that operate 
the NMS Stock ATS may be able to see the size, side, and symbol of an 
order but not the identity of the subscriber that submitted the order. 
The Commission preliminarily believes that subscribers and potential 
subscribers to the NMS Stock ATS likely would find it useful to know 
the range of confidential trading information that a person may have 
access to. Item 10(b) would also require the disclosure of the 
circumstances under which confidential trading information may be 
accessed by permitted persons. This disclosure requirement is designed 
to encompass the reasons for which confidential subscriber information 
might be accessed. For example, an NMS Stock ATS may only permit its 
designated employees access to confidential subscriber information when 
it is necessary to break certain trades or to perform system 
maintenance or repairs. Disclosures in Item 10(b) generally should 
describe whether the information is available in real-time (i.e., as 
trading is occurring on the platform) or whether the information 
relates to historical activity by one or more subscribers.\439\
---------------------------------------------------------------------------

    \439\ For example, an NMS Stock ATS that permits access to the 
confidential trading information of subscribers for breaking trades 
generally should specify, if true, that access to that information 
would only be of previous activity on the NMS Stock ATS for the 
purpose of breaking a trade.
---------------------------------------------------------------------------

    Part III, Items 10(c) and (d) of proposed Form ATS-N closely track 
the existing requirements of Regulation ATS encompassed in Rule 
301(b)(10)(i)(B) and (b)(10)(ii) respectively. The Commission 
preliminarily believes that market participants and the Commission 
would benefit from a description of the NMS Stock ATS's standards in 
ensuring that employees of the NMS Stock ATS cannot trade for their own 
account using confidential trading information and the procedures 
adopted by the NMS Stock ATS to ensure its safeguards and procedures 
are followed. The Commission notes that, pursuant to existing Rule 
301(b)(10), the Commission requires ATSs to have in place such 
standards, policies, and procedures. As discussed in greater detail 
below, the Commission is proposing to amend Regulation ATS to provide 
that these standards, policies, and procedures be written.\440\ By 
requiring that these standards, policies, and procedures be written and 
that a description of them be publicly disclosed in Part III, Item 10 
of proposed Form ATS-N, NMS Stock ATSs may be encouraged to carefully 
consider the adequacy of their means of protecting the confidential 
trading information of subscribers, which may result in more robust 
protections of such information. Market participants would be able to 
evaluate the relative robustness of such standards, policies, and 
procedures based on the disclosures provided in Part III, Item 10 of 
proposed Form ATS-N, which would in turn allow them to better evaluate 
the NMS Stock ATS to which they might route orders or become a 
subscriber.
---------------------------------------------------------------------------

    \440\ See infra Section IX.
---------------------------------------------------------------------------

Request for Comment
    248. Do you believe the Commission should require the disclosure of 
the information on Part III, Item 10 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    249. Do you believe Part III, Item 10 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the written safeguards and 
written procedures to protect the confidential trading information of 
subscribers to the NMS Stock ATS? Why or why not? Please support your 
arguments.
    250. Do you believe that Part III, Item 10 of proposed Form ATS-N 
is sufficiently clear with respect to the disclosures that would be 
required relating to the NMS Stock ATS's obligations under Rule 
301(b)(10) of Regulation ATS, including a description of the safeguards 
and procedures of the NMS Stock ATS to protect the confidential trading 
information of subscribers? If not, how should Part III, Item 10 of 
proposed Form ATS-N be revised to provide additional clarity? Please 
explain.
    251. Do you believe that any of information in the proposed 
disclosure requirements of Part III, Item 10 of proposed Form ATS-N, 
including a description of the NMS Stock ATS's safeguards and 
procedures to protect the confidential trading information of 
subscribers, should not be required to be disclosed on proposed Form 
ATS-N due to concerns regarding confidentiality, business reasons, 
trade secrets, burden, or any other concerns? If so, what information 
and why? Please support your arguments.
    252. Do you believe that the proposed disclosures in Part III, Item 
10(a) of proposed Form ATS-N requiring an NMS Stock ATS to describe the 
means by which a subscriber can consent or withdraw consent to the 
disclosure of confidential trading information should be disclosed? Do 
ATSs that currently transact in NMS stock inform subscribers as to what 
trading information is considered confidential and/or provide a means 
for subscribers to give or withdraw consent to the disclosure of such 
trading information? Please explain.
    253. Do you believe that the proposed disclosures in Part III, Item 
10(b) of proposed Form ATS-N requiring an NMS Stock ATS to identify the 
positions or titles of any persons that have access to the confidential 
trading information of subscribers, what information they may obtain, 
and the circumstances under which such persons may obtain that 
information should be disclosed? Why or why not? Please support your 
arguments.
    254. Do you believe there is other information that market 
participants might find relevant or useful regarding NMS Stock ATSs 
obligations under Rule 301(b)(10) and the protection of the 
confidential trading information of subscribers that has not been 
proposed in Part III, Item 10 of proposed Form ATS-N? If so, describe 
such information and explain whether, and if so why, such information 
should be required to be provided under proposed Form ATS-N. Please 
support your arguments.
    255. What are the potential costs and benefits of disclosing the 
information required by Part III, Item 10 of proposed Form ATS-N? Would 
the proposed

[[Page 81060]]

disclosures in Part III, Item 10 of proposed Form ATS-N require broker-
dealer operators of NMS Stock ATSs to reveal too much (or not enough) 
information about their structure and operations? Why or why not? 
Please support your arguments.
    256. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part III, Item 
10 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part III, Item 10?

VIII. Part IV of Proposed Form ATS-N: The Manner of Operations of the 
NMS Stock ATS

    Given the dispersal of trading volume in NMS stocks among an 
increasing number of trading centers,\441\ the decision of where to 
route orders to obtain best execution for market participants is 
critically important. Today, NMS Stock ATSs account for a significant 
source of liquidity for NMS stocks and compete with, and operate 
functionally similar to, registered national securities exchanges.\442\ 
Notwithstanding the importance of NMS Stock ATSs as a source of 
liquidity in NMS stocks and the increasing operational complexity of 
NMS Stock ATSs, market participants have limited information about how 
these markets operate. The Commission is concerned that this lack of 
operational transparency impedes market participants from adequately 
discerning how orders interact, match, and execute on NMS Stock ATSs, 
and may hinder market participants' ability to obtain, or monitor for, 
best execution for their orders. The current disclosures on Form ATS 
are confidential, and even in cases where an ATS voluntarily discloses 
its Form ATS publicly, ATSs have often been reluctant to provide more 
than summary disclosures about their operations. As a result, neither 
the Commission nor market participants currently receive a full picture 
of the operations of NMS Stock ATSs. The Commission preliminarily 
believes that the information that would be disclosed on proposed Form 
ATS-N, and in particular Part IV of the Form, would significantly 
improve the opportunity for market participants and the Commission to 
understand the operations of NMS Stock ATSs.
---------------------------------------------------------------------------

    \441\ See supra Section III.A (discussing the various trading 
venues for NMS stocks and the significance of NMS Stock ATSs as a 
significant source of liquidity).
    \442\ See id.
---------------------------------------------------------------------------

    Part IV of proposed Form ATS-N would require that the NMS Stock ATS 
include as Exhibit 4 information about the operations of an NMS Stock 
ATS. Specifically, Part IV of proposed Form ATS-N would require 
detailed information about the operations of NMS Stock ATSs, including 
the following, which are discussed in more detail below: Subscribers; 
hours of operations; order types; connectivity and order entry; 
segmentation of order flow; display of orders and trading interest; 
trading services; procedures governing suspension of trading and 
trading during system disruptions and malfunctions; opening, reopening, 
closing and after-hours trading procedures; outbound routing from the 
NMS Stock ATS; use of market data by the NMS Stock ATS; fees; trade 
reporting, clearance and settlement procedures; order display and 
execution access; and fair access standards. The proposed disclosure 
requirements are designed to assist market participants in assessing an 
NMS Stock ATS as a trading venue. The Commission preliminarily believes 
that the information that would be required to be disclosed on proposed 
Form ATS-N would allow market participants to compare and evaluate NMS 
Stock ATSs, as well as compare NMS Stock ATSs with national securities 
exchanges, as the type and level of information required by Part IV of 
proposed Form ATS-N would be generally similar to the information 
disclosed by national securities exchanges about their operations. For 
example, the rules of national securities exchanges, which are publicly 
available,\443\ include membership eligibility requirements, hours of 
operations, the operation of order types, the structure of the market 
(e.g., auction market, limit order matching book), priority, and 
opening and closing procedures, among other things. In addition, 
information provided on proposed Form ATS-N should assist the 
Commission, and the SRO for the broker-dealer operator, in exercising 
oversight over the broker-dealer operator.\444\
---------------------------------------------------------------------------

    \443\ See supra note 303.
    \444\ The SRO for an ATS has responsibility for overseeing the 
activities of the broker-dealer operator, which includes the 
activities of the NMS Stock ATS and surveilling the trading that 
occurs on the NMS Stock ATS. See Regulation ATS Adopting Release, 
supra note 7, at 70863.
---------------------------------------------------------------------------

A. Subscribers

    Part IV, Item 1 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose information regarding any eligibility requirements to 
access the NMS Stock ATS, terms and conditions of use, types of 
subscribers, arrangements with liquidity providers, and any procedures 
or standards to limit or deny access to the NMS Stock ATS.\445\
---------------------------------------------------------------------------

    \445\ The Commission notes that Exhibit A of current Form ATS 
requires an ATS to describe its classes of subscribers (for example, 
broker-dealer, institution, or retail) and any differences in access 
to the services offered by the ATS to different groups or classes of 
subscribers. Part IV, Section 1 of proposed Form ATS-N would require 
similar information, but the proposed requirements of Form ATS-N are 
designed to solicit more detailed information than that currently 
solicited by Form ATS.
---------------------------------------------------------------------------

    Part IV, Item 1(a) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any eligibility requirements to gain access to 
the services of the NMS Stock ATS. If the eligibility requirements are 
not the same for all subscribers and persons, an NMS Stock ATS would be 
required to describe any differences. This item is designed to provide 
potential subscribers with information about any conditions they would 
need to satisfy prior to accessing the NMS Stock ATS. Based on 
Commission experience, the eligibility process and requirements to 
access an NMS Stock ATS vary, and the requirements may differ depending 
on whether a potential subscriber is a customer of the broker-dealer 
operator of the NMS Stock ATS. For instance, some NMS Stock ATSs 
require that a potential subscriber be a broker-dealer to enter orders 
on the NMS Stock ATS, while other NMS Stock ATSs do not. Some NMS Stock 
ATSs may require potential subscribers to submit financial information 
as a pre-requisite to subscribing to, or maintaining their subscriber 
status on, the NMS Stock ATS.\446\ The Commission preliminarily 
believes that market participants would find it useful to understand an 
NMS Stock ATS's eligibility requirements so they may determine whether 
they may qualify for access to an NMS Stock ATS.\447\ The Commission 
preliminarily believes that making such information publicly available 
would provide efficiencies, as a market participant could source 
information about, and compare and contrast, the eligibility processes 
and requirements to access different NMS Stock ATSs. The Commission 
also preliminary believes that it would be better able to monitor

[[Page 81061]]

the extent to which NMS Stock ATSs are available to market participants 
and obtain a thorough understanding of NMS Stock ATS's eligibility 
processes and requirements.
---------------------------------------------------------------------------

    \446\ See Regulation ATS Adopting Release, supra note 7, at 
70859 (stating that the limitation on ATSs governing the conduct of 
subscribers does not preclude an ATS from requiring financial 
information from subscribers).
    \447\ See Liquidnet letter #1, supra note 166 and accompanying 
text (stating disclosures should include the admission criteria for 
each ATS).
---------------------------------------------------------------------------

Request for Comment
    257. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 1(a) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    258. Do you believe Part IV, Item 1(a) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to eligibility requirements to 
gain access to the services of the NMS Stock ATS? Why or why not? 
Please support your arguments.
    259. Is it sufficiently clear what information would be required by 
Part IV, Item 1(a) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    260. Do you believe there is other information that market 
participants might find relevant or useful regarding the eligibility 
process or requirements to gain access to the services of the NMS Stock 
ATS? If so, describe such information and explain whether, and if so 
why, such information should be required to be provided under proposed 
Form ATS-N. Please support your arguments.
    261. Do you believe there is any information that would be required 
by Part IV, Item 1(a) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    262. Do you believe that subscribers and potential subscribers 
would benefit from knowing the eligibility requirements of the NMS 
Stock ATS? Why or why not? Please support your arguments.
    263. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 1(a) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 1(a) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    264. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
1(a) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 1(a)?
    Part IV, Item 1(b) of proposed Form ATS-N would require an NMS 
Stock ATS to describe the terms and conditions of any contractual 
agreements for granting access to the NMS Stock ATS for the purpose of 
effecting transactions in securities or for submitting, disseminating, 
or displaying orders on the NMS Stock ATS, and to state whether these 
contractual agreements are written. Furthermore, if the terms and 
conditions of any contractual agreements are not the same for all 
subscribers and persons, the NMS Stock ATS would be required to 
describe any differences. Based on Commission experience, these 
contractual agreements may or may not be in writing, and the terms and 
conditions therein can vary among subscribers to the NMS Stock ATSs.
    The Commission preliminarily believes that it would be important 
for all subscribers to have access to all relevant information 
regarding the terms and conditions for accessing the trading services 
of the NMS Stock ATS, which today may not always be available to all 
subscribers. This item would allow subscribers to understand their 
rights and obligations in connection with their use of the NMS Stock 
ATS, and allow subscribers and potential subscribers to assess whether 
other market participants may have access arrangements more favorable 
than their own. This information is designed to help market 
participants when evaluating which trading centers they could or would 
like to access, and on which terms they could seek executions on those 
trading centers. The Commission preliminarily believes that having such 
information publicly available would provide efficiencies as market 
participants could more easily source information about the terms and 
conditions under which they could trade across NMS Stock ATSs, as well 
as compare those terms and conditions to those of national securities 
exchanges. The Commission understands that some NMS Stock ATSs 
communicate the terms and conditions to access the NMS Stock ATS orally 
to subscribers, often as part of an onboarding process, and do not 
provide written contractual agreements. The Commission preliminarily 
believes that market participants would benefit from knowing whether a 
written contractual agreement exists that sets forth the terms and 
conditions for accessing and trading on the NMS Stock ATS. Furthermore, 
the Commission preliminarily believes that the disclosures that would 
be required under Item 1(b) would better inform potential subscribers 
about whether additional inquiry is necessary to fully understand the 
terms and conditions for trading on the NMS Stock ATS.
Request for Comment
    265. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 1(b) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    266. Do you believe Part IV, Item 1(b) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the terms and conditions of 
any contractual agreements for granting access to the NMS Stock ATS? 
Why or why not? Please support your arguments.
    267. Is it sufficiently clear what information would be required by 
Part IV, Item 1(b) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    268. Do you believe there is other information that market 
participants might find relevant or useful regarding the terms and 
conditions of any contractual agreements by which access is granted to 
the services of the NMS Stock ATS? If so, describe such information and 
explain whether, and if so why, such information should be required to 
be provided under proposed Form ATS-N. Please support your arguments.
    269. Do you believe there is any information that would be required 
by Part IV, Item 1(b) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    270. Do you believe that NMS Stock ATSs commonly have written 
contractual agreements for granting access to the NMS Stock ATS? Why or 
why not, and what is the basis for such belief? If not, how is access 
granted? How are the terms and conditions of trading on the NMS Stock 
ATS communicated to subscribers? Is there commonly an onboarding 
process for new subscribers? What does such onboarding process entail? 
Please explain in detail.
    271. Do you believe there are agreements between subscribers and an 
NMS Stock ATS that are not written? If so, what is the basis for your 
belief,

[[Page 81062]]

what do those non-written agreements encompass, and how are they 
communicated to subscribers? Are any materials other than contracts 
provided to subscribers that set forth terms and conditions for 
granting access to the NMS Stock ATS? Please explain in detail.
    272. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 1(b) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 1(b) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    273. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
1(b) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 1(b)?
    Part IV, Item 1(c) of proposed Form ATS-N would require an NMS 
Stock ATS to describe the types of subscribers and other persons that 
use the services of the NMS Stock ATS (e.g., institutional and retail 
investors, broker-dealers, proprietary trading firms). The NMS Stock 
ATS would also be required to state whether it accepts non-broker-
dealers as subscribers to the NMS Stock ATS and describe any criteria 
for distinguishing among types of subscribers, classes of subscribers, 
or other persons.
    This item would provide information about the types of subscribers 
to the NMS Stock ATS, or other persons that can enter orders onto the 
NMS Stock ATS, so that market participants and the Commission would be 
better informed about the type of order flow that may be present on the 
NMS Stock ATS. Moreover, this item would, in conjunction with the other 
disclosure requirements of proposed Form ATS-N regarding differences in 
access to services or functionality of the NMS Stock ATS, inform market 
participants of any privileges or restrictions that attach to different 
categories of subscribers so that subscribers could evaluate which 
privileges or restrictions might apply to them or the counterparties 
against which they would be trading.\448\ For example, an NMS Stock ATS 
may only allow certain types of subscribers, including institutional 
investors, retail investors, broker-dealers, or proprietary trading 
firms, to enter a certain type of order on the NMS Stock ATS. 
Additionally, NMS Stock ATSs may assign different priorities to orders 
based on the types of subscribers that entered the orders on the NMS 
Stock ATS, such as orders originating from retail brokerage accounts or 
proprietary traders. Furthermore, the Commission understands that 
subscribers may wish to preclude or limit the interaction of their 
orders with the orders of certain other subscribers for several 
reasons, such as to help reduce information leakage or the possibility 
of trading with counterparties that they perceive to be undesirable. 
Accordingly, the Commission preliminarily believes that subscribers 
would find it useful to know the types of subscribers or other persons 
transacting on the NMS Stock ATS, and with that knowledge, they would 
be in a better position to evaluate the order flow on the NMS Stock ATS 
and determine whether they may wish to send their orders to the NMS 
Stock ATS for execution.\449\ The Commission also preliminarily 
believes that increased transparency regarding the types of 
subscribers--and distinctions an NMS Stock ATS makes among subscribers 
or other persons when trying to access the ATS--would advance the 
Commission's objective of protecting investors by giving them better 
information with which to protect their own interests.
---------------------------------------------------------------------------

    \448\ But see supra notes 92-95 and 427-429 and accompanying 
text (discussing the fair access requirements of Regulation ATS).
    \449\ See Lime Brokerage letter, supra note 192 and accompanying 
text (stating the Commission should require ``transparency around . 
. . membership of dark pools'').
---------------------------------------------------------------------------

Request for Comment
    274. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 1(c) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    275. Do you believe Part IV, Item 1(c) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the types of subscribers and 
other persons that use the services of the NMS Stock ATS? Why or why 
not? Please support your arguments.
    276. Is it sufficiently clear what information would be required by 
Part IV, Item 1(c) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    277. Do you believe there is other information that market 
participants might find relevant or useful regarding distinctions made 
by the NMS Stock ATS among subscribers? If so, describe such 
information and explain whether, and if so why, such information should 
be required to be provided under proposed Form ATS-N. Please support 
your arguments.
    278. Do you believe there is any information that would be required 
by Part IV, Item 1(c) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    279. Do you believe that the information that would be required by 
Part IV, Item 1(c) of proposed Form ATS-N would aid subscribers in 
evaluating the order flow on the NMS Stock ATS and determining whether 
they wish to send their orders there for execution? Why or why not? 
Please support your arguments.
    280. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 1(c) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 1(c) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    281. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
1(c) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 1(c)?
    Part IV, Item 1(d) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any formal or informal arrangement the NMS Stock 
ATS has with a subscriber(s) or person(s) to provide liquidity to the 
NMS Stock ATS (e.g., undertaking to buy or sell continuously, or to 
meet specified thresholds of trading or quoting activity). Item 1(d) 
would further require an NMS Stock ATS to describe the terms and 
conditions of each arrangement and identify any liquidity providers 
that are affiliates of the broker-dealer operator.
    An NMS Stock ATS may want to ensure that there is sufficient 
liquidity in a particular NMS stock to incentivize subscribers to send 
order flow in that NMS stock to the NMS Stock ATS; market participants 
may believe they are more likely to get an execution because of such 
liquidity. The Commission understands that some ATSs that trade

[[Page 81063]]

NMS stocks may engage certain subscribers to provide liquidity to the 
NMS Stock ATS and perform similar functions to that of a market maker 
on a national securities exchange.\450\ These liquidity providers may 
quote in a particular NMS stock on the NMS Stock ATS during trading 
hours and may receive a benefit for performing this function, such as 
discounts on fees, rebates, or the opportunity to execute with a 
particular type of segmented order flow.\451\ The obligations required 
of liquidity providers and the benefits they are provided vary across 
NMS Stock ATSs. Accordingly, the Commission proposes to require NMS 
Stock ATSs to describe the terms of any formal or informal arrangement 
with a liquidity provider, which could entail such obligations and 
benefits as well as a description of the process by which a subscriber 
could become a liquidity provider on the NMS Stock ATS. The Commission 
preliminarily believes that information about liquidity providers would 
be useful to subscribers and market participants who, for example, may 
want their orders to only interact with agency orders (and not with 
those of a liquidity provider), or, conversely, may themselves want to 
become a liquidity provider on the NMS Stock ATS.
---------------------------------------------------------------------------

    \450\ See, e.g., The NASDAQ Stock Market LLC, Rule 4613, Market 
Maker Obligations. Market-makers on a national securities exchange 
typically undertake, among other things, two-sided quote obligations 
where the market maker holds itself out as willing to buy and sell a 
particular security or securities for its own account on a 
continuous basis during trading hours. The obligations required of 
market makers may vary across national securities exchanges.
    \451\ Often, market makers on national securities exchanges are 
provided benefits for providing liquidity to the exchange, such as 
fee discounts, rebates, or volume incentive programs that may not be 
available to non-market makers. See, e.g., The NASDAQ Stock Market 
LLC, Rule 7014, Market Quality Incentive Programs (describing the 
``Qualified Market Maker Program'' and ``Lead Market Maker 
Program''). The attendant benefits provided to market makers may 
vary across national securities exchanges.
---------------------------------------------------------------------------

    Part IV, Item 1(d) of proposed Form ATS-N would also require an NMS 
Stock ATS to identify any liquidity providers that are affiliates of 
the broker-dealer operator. The Commission preliminarily believes that 
market participants would find it useful to know whether the broker-
dealer operator itself, or its affiliates, have an arrangement to 
provide liquidity to the NMS Stock ATS. The Commission preliminarily 
believes that such information could reveal potential conflicts of 
interest, if, for example, an NMS Stock ATS were to only permit 
affiliates to act as liquidity providers and provided significant 
benefits for performing that function.
Request for Comment
    282. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 1(d) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    283. Do you believe Part IV, Item 1(d) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to any formal or informal 
arrangement the NMS Stock ATS has with a subscriber(s) or person(s) to 
provide liquidity to the NMS Stock ATS? Why or why not? Please support 
your arguments.
    284. Is it sufficiently clear what information would be required by 
Part IV, Item 1(d) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    285. Do you believe there is other information that market 
participants might find relevant or useful regarding arrangements with 
subscribers or other persons to provide liquidity to the NMS Stock ATS? 
If so, describe such information and explain whether, and if so why, 
such information should be required to be provided under proposed Form 
ATS-N. Please support your arguments.
    286. Do you believe there is any information that would be required 
by Part IV, Item 1(d) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    287. Do you believe that the information that would be required by 
Part IV, Item 1(d) of proposed Form ATS-N would aid subscribers in 
evaluating the order flow on the NMS Stock ATS and determining whether 
they wish to send their orders there for execution? Why or why not? 
Please support your arguments.
    288. Do you believe that the proposed requirement in Part IV, Item 
1(d) of proposed Form ATS-N that the NMS Stock ATS identify any 
liquidity providers that are affiliates of the broker-dealer operator 
would aid subscribers in evaluating potential conflicts of interest of 
the broker-dealer operator, the order flow on the NMS Stock ATS, and 
determining whether they wish to send their orders there for execution? 
Why or why not? Please support your arguments.
    289. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 1(d) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 1(d) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    290. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
1(d) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 1(d)?
    Part IV, Item 1(e) of proposed Form ATS-N would require an NMS 
Stock ATS to describe the circumstances by which access to the NMS 
Stock ATS for a subscriber or other person may be limited or denied, 
and describe any procedures or standards that are used to determine 
such action. If these circumstances, procedures, or standards are not 
applicable to all subscribers and persons, the NMS Stock ATS would be 
required to describe any differences. As an ATS, an NMS Stock ATS 
cannot exercise SRO powers and may not discipline subscribers other 
than by excluding them from trading.\452\ The Commission understands 
that ATSs that trade NMS stocks have rules governing subscribers' 
participation on the ATS, and that if a subscriber fails to comply with 
these rules, the ATS may limit or deny access to the NMS Stock 
ATS.\453\ These limitations can result in some subscribers having 
different levels of functionality or more favorable terms of access 
than others. The Commission preliminarily believes that it is important 
for subscribers to have advance notice of the circumstances under which 
their access to NMS Stock ATSs would be limited or denied, and the 
procedures or standards that would be used to govern such actions. The 
Commission preliminarily believes that understanding such information 
would provide efficiencies as a market participant could source 
information about potential limits to accessing an

[[Page 81064]]

NMS Stock ATS, even if that market participant otherwise meets the 
eligibility criteria for subscribing to the NMS Stock ATS, and it would 
allow them to evaluate whether any limitations may result in receiving 
less favorable access from the NMS Stock ATS. The increased 
transparency regarding these procedures also may advance the 
Commission's objective of protecting investors by helping the 
Commission to understand when NMS Stock ATSs deny or limit access to 
market participants.
---------------------------------------------------------------------------

    \452\ See supra note 286 and accompanying text.
    \453\ Form ATS-R, Exhibit C requires an ATS subject to the fair 
access obligations under Rule 301(b)(5) of Regulation ATS to list 
all persons granted, denied, or limited access to the ATS during the 
period covered by the ATS-R report, designating for each person (a) 
whether they were granted, denied, or limited access; (b) the date 
the alternative trading system took such action; (c) the effective 
date of such action; and (d) the nature of any denial on limitation 
of access. See Form ATS-R.
---------------------------------------------------------------------------

Request for Comment
    291. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 1(e) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    292. Do you believe Part IV, Item 1(e) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the circumstances by which 
access to the NMS Stock ATS for a subscriber or other person may be 
limited or denied? Please explain.
    293. Is it sufficiently clear what information would be required by 
Part IV, Item 1(e) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    294. Do you believe there is other information that market 
participants might find relevant or useful regarding the process by 
which access to an NMS Stock ATS for a subscriber may be limited or 
denied? If so, describe such information and explain whether, and if so 
why, such information should be required to be provided under proposed 
Form ATS-N. Please support your arguments.
    295. Do you believe there is any information that would be required 
by Part IV, Item 1(e) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    296. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 1(e) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 1(e) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    297. Do you believe there are circumstances under which NMS Stock 
ATSs currently limit the functionality available to subscribers due to 
an action or inaction on the part of a subscriber? If so, what is the 
basis for your belief, what are those circumstances, and what 
functionality is typically limited? Is it common for an NMS Stock ATS 
to deny access to subscribers as opposed to limiting access? Why or why 
not, and under what circumstances? Please be specific.
    298. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
1(e) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Items 1(e)?

B. Hours of Operations

    Part IV, Item 2(a) of proposed Form ATS-N would require an NMS 
Stock ATS to provide the days and hours of operation of the NMS Stock 
ATS, including the times when orders or other trading interest are 
entered on the NMS Stock ATS and the time when pre-opening or after-
hours trading occur. Also, if the times when orders or other trading 
interest are entered on the NMS Stock are not the same for all 
subscribers and persons, Part IV, Item 2(b) would require the NMS Stock 
ATS to describe any differences.
    The Commission preliminarily believes that it is important for 
subscribers and the Commission to have information regarding when NMS 
Stock ATSs are operating and when orders can be entered on those 
trading centers, including when an NMS Stock ATS will accept orders 
outside of standard operating hours. The Commission notes that national 
securities exchanges' rulebooks, which are publicly available, include 
such information.\454\ Making such information publicly available for 
NMS Stock ATSs would enable market participants to more easily compare 
when trading interest may be entered on NMS stock trading centers. This 
information also would allow the Commission to better understand the 
operations of NMS Stock ATSs.
---------------------------------------------------------------------------

    \454\ See, e.g., BATS Exchange Rules 1.5(c) (setting forth hours 
for the exchange's After Hours Trading Session), 1.5(r) (setting 
forth hours for the exchange's Pre-Opening Session), 1.5(w) (setting 
forth the hours for the exchange's Regular Trading Hours), and 11.1 
(setting forth the exchange's hours of trading and trading days, and 
when certain order types may be entered).
---------------------------------------------------------------------------

Request for Comment
    299. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 2 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    300. Do you believe Part IV, Item 2 of proposed Form ATS-N captures 
the information that is most relevant to understanding the operations 
of the NMS Stock ATS related to the days and hours of operation of the 
NMS Stock ATS? Why or why not? Please support your arguments.
    301. Do you believe there is other information that market 
participants might find relevant or useful regarding the hours of 
operation of an NMS Stock ATS? If so, describe such information and 
explain whether, and if so why, such information should be required to 
be provided under proposed Form ATS-N. Please support your arguments.
    302. Do you believe that Part IV, Item 2 of proposed Form ATS-N is 
sufficiently clear with respect to the disclosures that would be 
required? If not, how should Part IV, Item 2 of proposed Form ATS-N be 
revised to provide additional clarity? Please explain in detail.
    303. Do you believe there is any information that would be required 
by Part IV, Item 2 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? If so, 
what information and why? Please support your arguments.
    304. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 2 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 2 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    305. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 2 
of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part IV, Item 2?

C. Types of Orders

    Part IV, Item 3(a) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any types of orders that are entered on the NMS 
Stock ATS, their characteristics, operations, and how they are handled 
on the NMS Stock ATS, including: (i) Priority for each order type; (ii) 
conditions for each order

[[Page 81065]]

type; (iii) order types designed not to remove liquidity (e.g., post-
only orders); (iv) order types that adjust their price as changes to 
the order book occur (e.g., price sliding orders or pegged orders) or 
have a discretionary range; (v) the time-in-force instructions that can 
be used or not used with each order type; (vi) the availability of 
order types across all forms of connectivity to the NMS Stock ATS and 
differences, if any, between the availability of an order type across 
those forms of connectivity; (vii) whether an order type is eligible 
for routing to other trading centers; and (viii) the circumstances 
under which order types may be combined with a time-in-force or another 
order type, modified, replaced, canceled, rejected, or removed from the 
NMS Stock ATS.\455\ If the availability of order types and their terms 
and conditions are not the same for all subscribers and persons, Part 
IV, Item 3(b) would require the NMS Stock ATS to describe any 
differences. In addition, Part IV, Item 3(c) of Form ATS-N would 
require an NMS Stock ATS to describe any requirements and handling 
procedures for minimum order sizes, odd-lot orders, or mixed-lot 
orders. The NMS Stock ATS must also describe any differences if the 
requirements and handling procedures for minimum order sizes, odd-lot 
orders, or mixed-lot orders are not the same for all subscribers and 
persons.\456\
---------------------------------------------------------------------------

    \455\ Items 3(a)(i), (ii), (iii), (iv) and (vii) of proposed 
Form ATS-N provide further requirements of what needs to be included 
in responding to these items. See discussion under each item infra.
    \456\ The Commission notes that a broker-dealer operator may 
have valid business reasons for offering various order types to 
subscribers and the Commission is not proposing to limit the ability 
for a broker-dealer operator to have such arrangements.
---------------------------------------------------------------------------

    As discussed above, NMS Stock ATSs offer a wide range of order 
types and modifiers and offer different minimum order size 
requirements.\457\ Order types, in particular, are a primary means by 
which users of an NMS Stock ATS communicate their instructions for 
handling their orders to the NMS Stock ATS. Moreover, order types can 
be complex and operate in various ways, and the Commission is therefore 
proposing to request that NMS Stock ATSs provide the level of detail 
set forth in subsections (i) through (viii) of Item 3(a). The 
Commission believes that all market participants should have sufficient 
information about all aspects of the operations of order types 
available on an NMS Stock ATS to understand how to use order types to 
achieve their investing or trading objectives, as well as to understand 
how order types used by other market participants could affect their 
trading interest. Item 3(a) would require a complete and detailed 
description of the order types available on the NMS Stock ATS, their 
characteristics, operations, and how they are handled to provide 
transparency to market participants and the Commission. Subsection (i) 
of Item 3(a) would require that the NMS Stock ATS describe the priority 
rules for each order type. The description would be required to include 
the order type's priority on the NMS Stock ATS upon order entry as well 
as any subsequent change to priority (if applicable). Also, the NMS 
Stock ATS would need to describe whether an order type can receive a 
new time stamp (such as, for example, in the case of order types that 
adjust price), and such order type's priority vis-[agrave]-vis other 
orders on the book due to changes in the NBBO or other reference price. 
In addition, this subsection would also require a description of any 
instance in which the order type could lose execution priority to a 
later arriving order at the same price.
---------------------------------------------------------------------------

    \457\ See supra Section III.B.
---------------------------------------------------------------------------

    Subsection (ii) of Item 3(a) would require that the NMS Stock ATS 
describe any conditions for each order type. Such conditions would 
include: any price conditions, including how the order type is ranked 
and how price conditions affect the rank and price at which it can be 
executed; conditions on the display or non-display of an order; or 
conditions on the execution or routing of orders.
    Subsection (iii) of Item 3(a) would require that the NMS Stock ATS 
describe order types designed not to remove liquidity (e.g., post-only 
orders). The NMS Stock ATS would need to describe what occurs when such 
order is marketable against trading interest on the NMS Stock ATS when 
received.
    Subsection (iv) of Item 3(a) would require that the NMS Stock ATS 
describe order types that adjust their price as changes to the order 
book occur (e.g., price-sliding orders or pegged orders) or have a 
discretionary range. As part of a response, this description would be 
required to include an order's rank and price upon order entry and 
whether such prices or rank may change based on the NBBO or other 
market conditions when using such an order type. In addition, the 
description would have to include when the order type is executable and 
at what price the execution would occur, and also whether the price at 
which the order type can be executed ever changes. Also, if the order 
type can operate in different ways, the NMS Stock ATS would need to 
explain the default operation of the order type.
    Subsection (v) of Item 3(a) would require the NMS Stock ATS to 
describe the time-in-force instructions that can be used or not used 
with each order type.
    Subsection (vi) of Item 3(a) would require a description of the 
availability of order types across all forms of connectivity to the NMS 
Stock ATS and differences, if any, between the availability of order 
types across those forms of connectivity. For example, if an NMS Stock 
ATS offers certain order types to persons who connect through the 
broker-dealer operator, such as through use of a SOR (or similar 
functionality) or algorithm, as opposed to persons who connect directly 
through a FIX connection, that difference in availability would need to 
be described in response to this subsection.
    Subsection (vii) of Item 3(a) would require a description of 
whether the order type is eligible for routing to other trading 
centers. The response required by this item would be required to 
include, if it is routable, whether an order type can be used with any 
routing services offered.
    Subsection (viii) of Item 3(a) would require the NMS Stock ATS to 
describe the circumstances under which order types submitted to the NMS 
Stock ATS may be combined with a time-in-force or another order type, 
modified, replaced, canceled, rejected, or removed from the NMS Stock 
ATS. If an NMS Stock ATS allows a subscriber to combine separate order 
types, or combine an order type with a time-in-force restriction, both 
of those instances would be responsive to subsection (viii) of Item 
3(a).
    Part IV, Item 3(b) of proposed Form ATS-N would require the NMS 
Stock ATS to describe any differences if the availability of its orders 
types and their terms and conditions are not the same for all 
subscribers and persons.
    Part IV, Item 3(c) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any requirements and handling procedures for 
minimum order sizes, odd-lot orders, or mixed-lot orders. If the 
requirements and handling procedures for minimum order sizes, odd-lot 
orders, or mixed-lot orders are not the same for all subscribers and 
persons, the NMS Stock ATS would also be required to describe any 
differences. These would include, for example, any order size 
requirements that may differ based on factors such as the type of 
subscriber or person that uses the services of the NMS Stock ATS, or 
the type of order (e.g., if only certain subscribers or persons are 
eligible to use that order type).

[[Page 81066]]

    The Commission preliminarily believes that a detailed description 
of the characteristics of the order types of an NMS Stock ATS would 
assist subscribers in better understanding how their orders would 
function and interact with other orders on the NMS Stock ATS.\458\ It 
also would allow market participants to see what order types could be 
used by other market participants, which could affect the probability, 
timing, and quality of their own executions. Moreover, the Commission 
preliminarily believes that requiring comprehensive disclosure of an 
NMS Stock ATS's order types on proposed Form ATS-N would allow market 
participants to compare order types across NMS Stock ATSs and national 
securities exchanges. As a result, a market participant would be better 
able to assess the availability of order types and whether their 
characteristics would accomplish the market participant's investing or 
trading objectives.
---------------------------------------------------------------------------

    \458\ See Consumer Federation of America Letter, supra note 188 
and accompanying text (stating the Commission should require all 
ATSs to disclose certain information about the order types offered 
on the ATS); Liquidnet letter #1, supra note 171 and accompanying 
text (stating institutional brokers, including institutional ATSs, 
should disclose the order types offered).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the disclosures 
about the characteristics and functions of order types would allow the 
Commission to better oversee NMS Stock ATSs, and alert the Commission 
as to whether the function of a particular order type may violate the 
federal securities laws or the rules or regulations thereunder, such as 
the requirement under Rule 611 of Regulation NMS that a trading center 
have policies and procedures reasonably designed to prevent trade-
throughs of protected quotations in NMS stocks.\459\ The Commission 
preliminarily believes that the disclosures that would be required by 
Item 3(a) would help the Commission discover a potential violation of 
the federal securities laws and rules or regulations thereunder in a 
more expeditious manner than if the disclosures were not required. The 
disclosures required by Item 3(a) would also facilitate the 
Commission's comparison of how the characteristics of order types were 
described to subscribers and how they operate in practice as part of 
any examination of the NMS Stock ATS.
---------------------------------------------------------------------------

    \459\ See 17 CFR 242.611.
---------------------------------------------------------------------------

    The Commission preliminarily believes this information would also 
advance the Commission's interest in the protection of investors by 
allowing subscribers to clearly see the types of orders available to 
them, as well as potential counterparties, and any differences between 
the order types, available among participants on the NMS Stock ATS.
    As noted above, Part IV, Item 3(b) would require the NMS Stock ATS 
to describe any differences if the availability of its order types and 
their terms and conditions are not the same for all subscribers and 
persons. The Commission preliminarily believes that this information 
would be important for a market participant to better assess whether 
other participants on the NMS Stock ATS may receive advantageous or 
disadvantageous treatment as a result of the ATS's various order types 
and how that treatment may affect that market participant's trading 
interest. Information about any disparate treatment of investors also 
would be important for the Commission as it monitors developments in 
the national market system.
    Part IV, Item 3(c) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any requirements and handling procedures for 
minimum order sizes, odd-lot orders, or mixed-lot orders. The NMS Stock 
ATS would also be required to explain any differences if the 
requirements and handling procedures for minimum order sizes, odd-lot 
orders, or mixed-lot orders are not the same for all subscribers and 
persons. The information that would be required by Item 3(c) is 
designed to facilitate the entry of orders by subscribers by providing 
information on minimum order sizes, odd-lot orders, and mixed-lot 
orders. An explanation of how an NMS Stock ATS's requirements and 
conditions for minimum order sizes, odd-lot orders, and mixed-lot 
orders differ among subscribers and persons would also provide a market 
participant with information regarding how its trading interest would 
be handled vis-[agrave]-vis other market participants. The information 
that would be required by Item 3(c) would also be useful to the 
Commission's monitoring of developments in market structure.
Request for Comment
    306. Do you believe the Commission should require the disclosure of 
the information on Part IV, Items 3(a) through 3(c) of Form ATS-N? Why 
or why not? If so, what level of detail should be disclosed? Please be 
specific.
    307. Do you believe Part IV, Items 3(a) through 3(c) of proposed 
Form ATS-N captures the information that is most relevant to 
understanding the operations of the NMS Stock ATS related to the types 
of orders that are entered to the NMS Stock ATS, their characteristics, 
operations, and how they are handled on the NMS Stock ATS? Please 
explain.
    308. Is it sufficiently clear what information would be required by 
Part IV, Items 3(a) through 3(c) of proposed Form ATS-N? Should the 
items be refined in any way? If so, how? Please be specific.
    309. Do you believe the proposed requirement to disclose the 
information that would be required by Part IV, Item 3(a) of proposed 
Form ATS-N could impact innovation on NMS Stock ATSs? Why or why not? 
Please support your arguments.
    310. Do you believe there is other information that market 
participants might find relevant or useful regarding the types of 
orders that are entered to the NMS Stock ATS, their characteristics, 
operations, and how they are handled on the NMS Stock ATS? If so, 
describe such information and explain whether, and if so why, such 
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
    311. Do you believe there is any information that would be required 
by Part IV, Items 3(a) through 3(c) of proposed Form ATS-N that an NMS 
Stock ATS should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    312. Do you believe there are any other aspects of order types that 
an NMS Stock ATS should be required to disclose in a subpart to Part 
IV, Item 3(a) of proposed Form ATS-N that have not been identified? If 
so, what? Do you believe there are other order types about which the 
Commission should ask specifically? If so, what order types? Please 
explain in detail.
    313. Should the Commission require greater specificity regarding 
the operation of order types? If so, why and how? If not, why not? 
Please support your arguments.
    314. Do you believe that information relating to available order 
types would help market participants in determining the best trading 
venue for their orders? Why or why not? Please support your arguments.
    315. Do you believe that Items 3(a) through 3(c) of Part IV of 
proposed Form ATS-N would advance the Commission's interest in the 
protection of investors by allowing market participants to consider the 
types of orders available to them, as well as potential counterparties, 
and any differences between the order types, modifiers, and size 
requirements

[[Page 81067]]

available among participants on the NMS Stock ATS? Why or why not? 
Please support your arguments.
    316. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Items 
3(a) through 3(c) of proposed Form ATS-N other than through disclosure 
on proposed Form ATS-N? If so, how else could this information be 
obtained and would such alternative means be preferable to the proposed 
disclosures in Part IV, Items 3(a) through 3(c)?
    317. What are the potential costs and benefits of disclosing the 
information required by Part IV, Items 3(a) through 3(c) of proposed 
Form ATS-N? Would the proposed disclosures in Part IV, Items 3(a) 
through 3(c) of proposed Form ATS-N require an NMS Stock ATS to reveal 
too much (or not enough) information about its structure and 
operations? Why or why not? Please support your arguments.
    318. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of priority for each order type? Why or 
why not? Please support your answer.
    319. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of any conditions for each order type? Why 
or why not? Please support your answer.
    320. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of order types designed not to remove 
liquidity? Why or why not? Please support your answer.
    321. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of order types that adjust their price as 
changes to the order book occur or have a discretionary range? Why or 
why not? Please support your answer.
    322. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of the time-in-force instructions for each 
order type? Why or why not? Please support your answer.
    323. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of the availability of order types across 
all forms of connectivity to the NMS Stock ATS? Why or why not? Please 
support your answer.
    324. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of whether order types are eligible for 
routing to other trading centers? Why or why not? Please support your 
answer.
    325. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N 
should require a description of the circumstances under which order 
types may be combined with a time-in-force or another order type, 
modified, replaced, canceled, rejected, or removed from the NMS Stock 
ATS? Why or why not? Please support your answer.
    Part IV, Item 3(d) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any messages sent to or received by the NMS Stock 
ATS indicating trading interest (e.g., IOIs, actionable IOIs, or 
conditional orders), including information contained in the message, 
the means under which messages are transmitted, the circumstances in 
which messages are transmitted (e.g., automatically by the NMS Stock 
ATS or upon the subscriber's request), and the circumstances by which 
they may result in an execution on the NMS Stock ATS. If the terms and 
conditions regarding these messages, indications of interest, and 
conditional orders are not the same for all subscribers and persons, 
the NMS Stock ATS would be required describe any differences.
    This item is designed to provide specific information about the use 
of IOIs, actionable IOIs, conditional orders, and similar 
functionalities on the NMS Stock ATS. Based on the Commission's 
experience, IOIs are used by NMS Stock ATSs to convey trading interest 
available on those trading centers. Some NMS Stock ATSs also transmit 
``actionable'' IOIs to selected market participants for the purpose of 
attracting contra-side order flow to the ATS. In general, an actionable 
IOI is an IOI containing enough information to effectively alert the 
recipient about the details of the NMS Stock ATS's trading interest in 
a security. While an actionable IOI may not explicitly specify the 
price and/or size of the trading interest, the practical context in 
which it is submitted alerts the recipient about the side (buy or 
sell), size (minimum of a round lot of trading interest), and price (at 
or better than the NBBO, depending on the side of the order).
    Conditional orders are also messages indicating a trading interest 
on a trading venue, and conditional orders generally function in a 
similar manner to IOIs. A conditional order may contain the same 
attributes as other order types when a subscriber enters it onto the 
trading venue (e.g., side, price, and size), but NMS Stock ATSs will 
generally not transmit those details to other subscribers or market 
participants. Rather, the NMS Stock ATS will tentatively match the 
conditional order with contra side interest and then alert the 
subscriber that entered the conditional order of the potential match. 
That subscriber may then either accept or decline the execution (i.e., 
``firm up'' the conditional order). Based on Commission experience, NMS 
Stock ATSs typically only permit conditional orders to execute against 
other conditional orders, but some ATSs allow conditional orders to 
interact with other order types.
    The Commission preliminarily believes that understanding the manner 
in which NMS Stock ATSs use IOIs, actionable IOIs, conditional orders, 
and similar functionalities could be useful to market participants 
because it could impact the potential execution of a subscriber's 
trading interest. Also, because an actionable IOI conveys substantial 
information, the potential for information leakage could be a concern 
to NMS Stock ATS subscribers using IOIs, particularly when they are 
seeking to execute large-sized orders. In the Commission's experience, 
NMS Stock ATSs generally send IOIs and other conditional orders only to 
certain market participants. Accordingly, the disclosures that would be 
required by Item 3(d) are designed to help market participants better 
evaluate whether messages indicating trading interest (including IOIs, 
actionable IOIs, and conditional orders) are equally available to them 
as compared to other market participants and would be appropriate tools 
to accomplish their investing or trading objectives.
Request for Comment
    326. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 3(d) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    327. Do you believe Part IV, Item 3(d) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to any messages sent to or 
received by the NMS Stock ATS indicating trading interest? Please 
explain.
    328. Is it sufficiently clear what information would be required by 
Part IV, Item 3(d) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    329. Do you believe there is other information that market 
participants might find relevant or useful regarding messages 
indicating trading interest (e.g., IOIs, actionable IOIs, or 
conditional orders)? If so, describe such information and explain 
whether, and if so why, such information should be required to be 
provided under proposed Form ATS-N. Please support your arguments.
    330. Do you believe there are other types of messages that 
communicate

[[Page 81068]]

trading interest that the Commission should specifically cite as 
examples in Part IV, Item 3(d) of proposed Form ATS-N? If so, what are 
those message types? Please provide a detailed explanation of each 
additional type of message and support your arguments as to each.
    331. Do you believe there is any information that would be required 
by Part IV, Item 3(d) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why? Please support your 
arguments.
    332. Do you believe that there is potential concern for information 
leakage from the use of IOIs, particularly actionable IOIs on NMS Stock 
ATSs? If so, would disclosure about their operation on proposed Form 
ATS-N be an appropriate manner in which to mitigate any concern? If 
not, why not? Please support your arguments.
    333. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 3(d) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 3(d) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    334. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
3(d) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 3(d)?

D. Connectivity, Order Entry, and Co-Location

    Part IV Item 4(a) of proposed Form ATS-N would require the NMS 
Stock ATS to describe the means by which subscribers or other persons 
connect to the NMS Stock ATS and enter orders or other trading interest 
on the NMS Stock ATS (e.g., directly, through a Financial Information 
eXchange (``FIX'') connection to the ATS, or indirectly, through the 
broker-dealer operator's SOR, or any intermediate functionality, 
algorithm, or sales desk). This item also would require an NMS Stock 
ATS to describe any differences if the terms and conditions for 
connecting and entering orders or other trading interest on the NMS 
Stock ATS are not the same for all subscribers and persons.
    Based on Commission experience reviewing Forms ATS, subscribers 
send orders or other trading interest to the NMS Stock ATS both 
directly and indirectly. A direct method of sending orders or other 
trading interest to an ATS that trades NMS stocks, for example, may 
include the use of the FIX Protocol. The FIX Protocol allows 
subscribers to enter orders or other trading interest into the ATS 
without an intermediary. To the extent that a subscriber connects to 
the NMS Stock ATS by way of a FIX connection and an order sent by that 
subscriber passes through an intermediate application or functionality 
on its way to the NMS Stock ATS, the NMS Stock ATS should identify the 
application or functionality and provide a description of its 
purpose.\460\ One example of an indirect method of sending orders or 
other trading interest to an NMS Stock ATS is sending orders or other 
trading interest to the broker-dealer operator, which may then use its 
SOR (or similar functionality) or algorithm to send such orders or 
other trading interest to the NMS Stock ATS.
---------------------------------------------------------------------------

    \460\ The Commission notes that, in this example, given that the 
intermediate application or functionality has access to a 
subscriber's order information, the NMS Stock ATS should take 
appropriate measures to protect the confidentiality of such 
information pursuant to Rule 301(b)(10) of Regulation ATS.
---------------------------------------------------------------------------

    The disclosures regarding the direct or indirect means of order 
entry could be important to subscribers because they would provide 
information about the possible methods to reach the NMS Stock ATS and 
applicable system requirements necessary to send orders or other 
trading interest to the NMS Stock ATS. This information would also 
alert subscribers to the NMS Stock ATS as to whether trading interest 
can be entered on the NMS Stock ATS through the broker-dealer operator, 
which would allow subscribers to assess any potential advantages that 
orders sent through the broker-dealer operator may have with respect to 
other subscribers on the NMS Stock ATS.\461\ The Commission would find 
the information required by this item useful to understanding how 
trading interest moves from persons to possible trading centers and in 
evaluating any potential conflicts of interest presented between the 
broker-dealer operator and the NMS Stock ATS in how orders are entered 
onto the NMS Stock ATS.
---------------------------------------------------------------------------

    \461\ But see supra notes 92-95 and 427-429 and accompanying 
text (discussing the fair access requirements of Regulation ATS).
---------------------------------------------------------------------------

    The disclosure of the information required for order entry on the 
NMS Stock ATS, such as limit price, size, and/or side of the market, 
would inform all subscribers to the NMS Stock ATS about how to transmit 
orders or other trading interest to the NMS Stock ATS. The Commission 
preliminarily believes that understanding this information may expedite 
the order entry process of subscribers. The Commission, as part of its 
monitoring of developments in market structure, also could use this 
disclosure to better understand what information allows for the 
interaction of trading interest.
    The Commission preliminarily believes that requiring NMS Stock ATSs 
to disclose any differences if the terms and conditions for connecting 
and entering orders or other trading interest on the NMS Stock ATS are 
not the same for all subscribers and persons would allow market 
participants to source the various order entry procedures offered by 
NMS Stock ATSs as part of evaluating an NMS Stock ATS as a potential 
destination for them to route their orders for execution.
Request for Comment
    335. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 4(a) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    336. Do you believe Part IV, Item 4(a) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the means by which 
subscribers or other persons connect to the NMS Stock ATS and enter 
orders or other trading interest on the NMS Stock ATS? Please explain.
    337. Is it sufficiently clear what information would be required by 
Part IV, Item 4(a) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    338. What are the direct and indirect means through which 
subscribers and other persons can send orders or other trading interest 
to the NMS Stock ATS? Do you believe there any means for which the 
Commission should specifically request information in Part IV, Item 
4(a) of proposed Form ATS-N? If so, please explain how those means to 
send orders or other trading interest are used by subscribers and other 
persons.
    339. Do you believe there are any methods of sending orders or 
other trading interest to NMS Stock ATSs that are more advantageous 
than others? If so, please explain how such methods provide advantages 
to subscribers or other persons who use them. Should those advantages, 
if any, be specifically disclosed?

[[Page 81069]]

    340. Do you believe there is other information that market 
participants might find relevant or useful regarding the means by which 
subscribers can send orders or other trading interest to the NMS Stock 
ATS? If so, describe such information and explain whether, and if so 
why, such information should be required to be provided under proposed 
Form ATS-N. Please support your arguments.
    341. Do you believe there is any information that would be required 
by Part IV, Item 4(a) of Proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    342. Do you believe that the information that would be required by 
Part IV, Item 4(a) of proposed Form ATS-N could be important to market 
participants in assessing any potential advantages that orders sent 
through the broker-dealer operator may have over other market 
participants on the NMS Stock ATS? Why or why not? Please support your 
arguments.
    343. Do you believe that the information that would be required by 
Part IV, Item 4(a) of proposed Form ATS-N would be important to market 
participants when deciding whether to trade on an NMS Stock ATS and 
would assist them in devising appropriate trading strategies to help 
accomplish their investing or trading objectives? Why or why not? 
Please support your arguments.
    344. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 4(a) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 4(a) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    345. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
4(a) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 4(a)?
    Part IV Item 4(b) of proposed Form ATS-N would require that the NMS 
Stock ATS describe any co-location services or any other means by which 
any subscriber or other persons may enhance the speed by which to send 
or receive orders, trading interest, or messages to or from the NMS 
Stock ATS and the terms and conditions of co-location services. If the 
terms and conditions of the co-location services are not the same for 
all subscribers and persons, Part IV, Item 4(b) would require the NMS 
Stock ATS to describe any differences. Co-location is the placement of 
a user's systems in close physical proximity to the trading and 
execution system of a trading venue to reduce latency and enhance 
speed. The description of co-location services that could enhance the 
speed of orders and messages and the terms and conditions thereof would 
allow subscribers to evaluate these services and determine whether they 
would like to subscribe to such services if available. Moreover, 
subscribers and potential subscribers would know that others can use a 
co-location service even if they determine not to use it themselves, 
which would assist them in devising appropriate trading strategies if 
they choose to participate.\462\ For instance, a subscriber could 
choose certain types of orders or trading strategies with the knowledge 
that other subscribers have enhanced speeds for submitting trading 
interest through the use of the NMS Stock ATS's connectivity or co-
location services.
---------------------------------------------------------------------------

    \462\ See SIFMA letter #1, supra note 194 and accompanying text 
(stating its belief that ``added disclosure about co-location and 
other market access arrangements would be beneficial to market 
participants''); Morgan Stanley letter, supra note 197 and 
accompanying text (stating that it received questions from customers 
specific to dark pools related to the co-location of servers).
---------------------------------------------------------------------------

    The proposed requirement that the NMS Stock ATS describe any 
differences in the terms and conditions of an NMS Stock ATS's co-
location services among subscribers or other persons also could help 
inform the trading strategies chosen by subscribers. Information on 
such connectivity and co-location options would further the 
Commission's understanding of the dynamics of the markets and overall 
market structure for NMS stocks. In addition, this information would 
allow the Commission to evaluate whether the NMS Stock ATS is 
unreasonably prohibiting or limiting any person with respect to the 
access to services offered by the NMS Stock ATS in contravention of 
Rule 301(b)(5) of Regulation ATS for those NMS Stock ATSs that have 
surpassed the applicable trading volume thresholds.
Request for Comment
    346. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 4(b) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    347. Do you believe Part IV, Item 4(b) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to co-location services or any 
other means by which any subscriber or other persons may enhance the 
speed by which to send or receive orders, trading interest, or messages 
to or from the NMS Stock ATS? Please explain.
    348. Is it sufficiently clear what information would be required by 
Part IV, Item 4(b) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    349. Do you believe there is other information that market 
participants might find relevant or useful regarding co-location 
services by which a subscriber may enhance the speed that it may submit 
orders or send and receive messages? If so, describe such information 
and explain whether, and if so why, such information should be required 
to be provided under proposed Form ATS-N. Please support your 
arguments.
    350. Do you believe there is any information that would be required 
by Part IV, Item 4(b) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    351. Do believe that the information that would be required by Part 
IV, Item 4(b) of proposed Form ATS-N would be useful to market 
participants when deciding whether to trade on an NMS Stock ATS and 
would assist them in devising appropriate trading strategies to help 
accomplish their investing or trading objectives? Why or why not? 
Please support your arguments.
    352. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
4(b) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 4(b)?
    353. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 4(b) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 4(b) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.

[[Page 81070]]

E. Segmentation of Order Flow and Notice About Segmentation

    Part IV, Item 5(a) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any segmentation of orders or other trading 
interest on the NMS Stock ATS (e.g., classification by type of 
participant, source, nature of trading activity). Part IV, Item 5(a) 
would also require the NMS Stock ATS to describe the segmented 
categories, the criteria used to segment these categories, and 
procedures for determining, evaluating, and changing segmented 
categories. If the segmented categories, the criteria used to segment 
these categories, and any procedures for determining, evaluating or 
changing segmented categories are not the same for all subscribers and 
persons, this item would require an NMS Stock ATS to describe any 
differences.
    Based on Commission experience, some NMS Stock ATSs segment order 
flow entered on the NMS Stock ATS according to various categories and 
allow subscribers to select the type of persons or order flow they want 
to trade or not trade against. An NMS Stock ATS may segment trading 
interest by type of participant (e.g., buy-side or sell-side firms, 
proprietary trading firms, agency-only firms, firms above or below 
certain assets under management thresholds). For example, buy-side or 
institutional order flow may seek to only trade against other buy-side 
or institutional order flow, or may seek to avoid trading against 
proprietary trading firms or so-called high frequency trading firms. 
When segmenting by source, an NMS Stock ATS may look to the underlying 
source of the trading interest in the case of trading interest that is 
intermediated, such as the trading interest of retail customers. Some 
NMS Stock ATSs segment by the nature of the trading activity, which 
could include segmenting by patterns of behavior, time horizons of 
traders, or the passivity or aggressiveness of trading strategies. NMS 
Stock ATSs might elect to use some combination of these criteria or 
other criteria altogether.
    This item would require that an NMS Stock ATS disclose the 
segmented categories, the criteria used to segment these categories, 
and procedures for determining, evaluating, and changing segmented 
categories. This would include, for example, any modification or 
overriding of an existing segmented category and a description of how 
existing subscribers in the segmented category would be handled and 
notified. This item would provide market participants with an 
understanding of the categories of order flow or types of market 
participants with which they may interact and allow them to both assess 
the consistency of a segmented group and determine whether the manner 
in which the trading interest is segmented comports with its views of 
how certain trading interest should be categorized. Disclosure of the 
procedures and criteria used to segment categories would allow a market 
participant to determine whether its view of what constitutes certain 
trading interest it wants to seek or avoid is classified in the same 
way by the NMS Stock ATS. For example, a subscriber may find it useful 
to understand the metrics or criteria an NMS Stock ATS uses to 
categorize high frequency trading firms so that it can compare the 
criteria used by the NMS Stock ATS with its view of what constitutes a 
high frequency trading firm, and thus be able to successfully trade 
against or avoid such trading interest. Similarly, information 
regarding the procedures applicable to trading among segmented 
categories would allow market participants to evaluate whether they can 
successfully trade against or avoid the segments of trading interest 
they desire.
    In addition, disclosure of any differences in the segmentation 
among participants would allow subscribers to more clearly note if 
certain persons are, for instance, not subject to segmentation in the 
same way as other persons, or not subject to segmentation at all and 
able to trade against all order flow. All participants would have 
access to the same information as to how the NMS Stock ATS segments 
order flow, and whether the segmentation criteria are applied by the 
NMS Stock ATS uniformly.\463\ These disclosures would help the 
Commission understand the categories and manner in which persons and 
order flow (or both) are segmented across NMS Stock ATSs and could aid 
the Commission in its oversight of the markets including, for example, 
its evaluation of whether segmentation could facilitate or hinder 
market participants from achieving their investing or trading 
objectives. The Commission is not proposing to prohibit NMS Stock ATSs 
from segmenting their order flow; \464\ the Commission is instead 
proposing only that an NMS Stock ATS disclose to market participants 
and the Commission how they segment their order flow.
---------------------------------------------------------------------------

    \463\ See Blackrock letter, supra note 186 and accompanying text 
(stating mandatory ATS disclosure should include greater detail on 
how the platform matches orders between client segments); Consumer 
Federation of America letter, supra note 187 and accompanying text 
(stating that Form ATS should require ATSs to provide ``critical 
details about . . . segmentation'' because ``the information will 
allow market participants . . . to assess whether an ATS's terms of 
access and service are such that it makes sense to trade on that 
venue'').
    \464\ However, an ATS that crossed the fair access threshold and 
wished to segment its order flow could do so only in accordance with 
the fair access provisions of existing Rule 301(b)(5) of Regulation 
ATS.
---------------------------------------------------------------------------

Request for Comment
    354. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 5(a) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    355. Do you believe Part IV, Item 5(a) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to segmentation of orders or 
other trading interest on the NMS Stock ATS? Please explain.
    356. Is it sufficiently clear what information would be required by 
Part IV, Item 5(a) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    357. Do you believe there is other information that market 
participants might find relevant or useful regarding segmentation of 
order flow on the NMS Stock ATS? If so, describe such information and 
explain whether, and if so why, such information should be required to 
be provided under proposed Form ATS-N. Please support your arguments.
    358. Do you believe there is any information that would be required 
by Part IV, Item 5(a) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    359. Do you believe there are any forms or types of order 
segmentation that would not be captured by Part IV, Item 5(a) of 
proposed Form ATS-N or should be addressed separately? If so, please 
provide a detailed explanation of how orders are segmented under such 
functionalities on NMS Stock ATSs.
    360. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 5(a) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 5(a) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    361. Do you believe there are other ways to obtain the same 
information as

[[Page 81071]]

would be required from NMS Stock ATSs by Part IV, Item 5(a) of proposed 
Form ATS-N other than through disclosure on proposed Form ATS-N? If so, 
how else could this information be obtained and would such alternative 
means be preferable to the proposed disclosures in Part IV, Item 5(a)?
    Part IV, Item 5(b) of proposed Form ATS-N would require the NMS 
Stock ATS to state whether the NMS Stock ATS informs subscribers or 
persons about the segmentation category that a subscriber or a person 
is assigned and to describe any notice provided to subscribers or 
persons about the segmentation category that they are assigned and the 
segmentation identified in Part IV, Item 5(a), including the content of 
any notice and the means by which any notice is communicated. Also, an 
NMS Stock ATS would be required to describe any differences if the 
notice is not the same for all subscribers and persons. As discussed 
above, an NMS Stock ATS can elect to segment its order flow entered on 
the NMS Stock ATS according to various categories and allow subscribers 
and other persons to select the type of persons or order flow they want 
to trade or not trade against. Based on the experience of the 
Commission and its staff, ATSs provide subscribers with limited 
information about how they segment order flow and do not always inform 
subscribers about the categories into which they are segmented. A 
market participant that is unaware of its segmented category may not 
know about the order flow it is trading against, and therefore, the 
Commission preliminarily believes that market participants trading on 
an NMS Stock ATS would want to know about their assigned segmented 
categories and understand how those categories were determined.\465\ 
The category into which a subscriber is placed also informs its 
decision of where to trade because it could affect the contra-side 
trading interest available to them to trade against. Item 5(b) is 
therefore designed to inform market participants about the potential 
information that the NMS Stock ATS may provide to inform them about 
such segmentation, particularly with respect to whether the NMS Stock 
ATS informs subscribers about how it assigns a participant to a 
segmented category, as well as any differences in the notice provided 
to subscribers. The Commission preliminarily believes that market 
participants would find it useful to understand how they will be 
alerted about segmentation on an NMS Stock ATS before deciding whether 
or not to subscribe to the NMS Stock ATS.
---------------------------------------------------------------------------

    \465\ See supra notes 171, 186, 198, 199 and accompanying text.
---------------------------------------------------------------------------

Request for Comment
    362. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 5(b) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    363. Do you believe Part IV, Item 5(b) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to informing subscribers or 
persons about the segmentation category that a subscriber or a person 
is assigned? Please explain.
    364. Is it sufficiently clear what information would be required by 
Part IV, Item 5(b) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    365. Do you believe there is any information that would be required 
by Part IV, Item 5(b) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    366. Do you believe there is any specific information that the 
Commission should require NMS Stock ATSs to disclose to each subscriber 
with regard to how it segments each subscriber's orders? If so, explain 
what information and why. Please support your arguments.
    367. Do you believe transparency with respect to how an NMS Stock 
ATS notifies subscribers regarding how those subscribers' trading 
interests are segmented is useful to market participants when deciding 
whether to trade on the NMS Stock ATS and would assist them in devising 
appropriate trading strategies to help accomplish their investing or 
trading objectives? If not, why? Please support your arguments.
    368. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 5(b) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 5(b) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    369. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
5(b) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 5(b)?
    Part IV, Item 5(c) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any means and the circumstances by which a 
subscriber, the broker-dealer operator, or any of its affiliates may 
designate an order or trading interest submitted to the NMS Stock ATS 
to interact or not to interact with specific orders, trading interest, 
or persons on the NMS Stock ATS (e.g., designating an order or trading 
interest to be executed against a specific subscriber) and how such 
designations affect order priority and interaction. Part IV, Item 5(c) 
would require the NMS Stock ATS to describe any means by which 
subscribers can seek or avoid certain executions against certain 
orders, persons, or trading interest. In response to this item, an NMS 
Stock ATS would be required to disclose, for example, any circumstances 
by which an NMS Stock ATS allows persons to designate an order 
submitted to the NMS Stock ATS to interact with specific orders resting 
on the NMS Stock ATS. The NMS Stock ATS would need to describe this 
process and how such order preferencing works with other rules 
governing order priority and interaction. The response to this item 
also would also be required to include a description of any means by 
which a subscriber could avoid executing against any order, person, or 
trading interest. For instance, an NMS Stock ATS would need to describe 
any mechanisms by which a person could avoid executing against its own 
orders or orders of its affiliates on the NMS Stock ATS.
    The Commission preliminarily believes that it is important for 
market participants to understand whether--and how--they may designate 
their orders or other trading interest to avoid interacting with 
specific orders, trading interest, or persons on an NMS Stock ATS. The 
Commission preliminarily believes that this understanding would help 
market participants better evaluate the NMS Stock ATS as a potential 
trading venue. For instance, if a market participant seeks to avoid 
interacting with an order type that is commonly employed as part of 
certain trading strategies, the Commission preliminarily believes that 
the disclosures required under Item 5(c) would better enable that 
market participant to determine whether submitting order flow to a 
particular NMS Stock ATS would allow it to carry out its own trading 
strategy. Similarly, if a market participant would find it desirable to 
be able to designate an order submitted to the NMS Stock ATS to 
interact with specific orders resting

[[Page 81072]]

on an NMS Stock ATS's order book, the Commission preliminarily believes 
that the information required by Item 5(c) would inform that market 
participant whether--and how--it can do so on a particular NMS Stock 
ATS, thereby assisting that market participant when it evaluates that 
NMS Stock ATS as a potential trading venue.
Request for Comment
    370. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 5(c) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    371. Do you believe Part IV, Item 5(c) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the means and the 
circumstances by which a subscriber, the broker-dealer operator, or any 
of its affiliates may designate an order or trading interest submitted 
to the NMS Stock ATS to interact or not to interact with specific 
orders, trading interest, or persons on the NMS Stock ATS? Please 
explain.
    372. Do you believe there is other information that market 
participants might find relevant or useful regarding the means and the 
circumstances by which a subscriber, the broker-dealer operator, or any 
of its affiliates may designate an order or trading interest submitted 
to the NMS Stock ATS to interact or not to interact with specific 
orders, trading interest, or persons on the NMS Stock ATS? If so, 
describe such information and explain whether, and if so why, such 
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
    373. Is it sufficiently clear what information would be required by 
Part IV, Item 5(c) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    374. Do you believe there is any information that would be required 
by Part IV, Item 5(c) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    375. Should the requirement to describe the means by which persons, 
orders, or trading interest may be sought or avoided on an NMS Stock 
ATS be refined in any way? Please be specific.
    376. Does the process for seeking or avoiding specific orders, 
persons, or trading interest raise any other market structure issues or 
concerns that the Commission should consider? Please be specific.
    377. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 5(c) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 5(c) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    378. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
5(c) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 5(c)?

F. Display of Order and Trading Interest

    Part IV, Item 6(a) of proposed Form ATS-N would require that an NMS 
Stock ATS describe any means and circumstances by which orders or other 
trading interest on the NMS Stock ATS are displayed or made known 
outside the NMS Stock ATS and the information about the orders and 
trading interest that are displayed. Also, if the display of orders or 
other trading interest is not the same for all subscribers and persons, 
the NMS Stock ATS would be required to describe any differences. Part 
IV, Item 6(b) of proposed Form ATS-N would also require the NMS Stock 
ATS to identify the subscriber(s) or person(s) (in the case of a 
natural person, to identify only the position or title) to whom the 
orders and trading interest are displayed or otherwise made known.
    As discussed more fully above,\466\ most NMS Stock ATSs do not 
publicly display quotation data and are commonly referred to as ``dark 
pools.'' The Commission preliminarily believes that market participants 
generally are very sensitive to precisely how and when their trading 
interest is displayed or otherwise made known outside the NMS Stock 
ATS. The Commission is concerned that market participants currently may 
not know the extent to which their trading interest sent to ATSs is 
displayed outside those ATSs. Accordingly, for any NMS Stock ATSs that 
display some or all of the trading interest on their systems, Part IV, 
Item 6 of proposed Form ATS-N would require the NMS Stock ATS to 
identify the subscriber(s) or person(s) to whom orders or other trading 
interest information is displayed or otherwise made known, the means 
and circumstances by which orders or other trading interest are 
displayed or made known, and the contents of that information. Because 
NMS Stock ATSs that are also ECNs may differ in how and where orders or 
other trading interest are displayed, the Commission preliminarily 
believes this item would clarify for market participants and the 
Commission exactly how such display may occur. In addition, an NMS 
Stock ATS would need to disclose arrangements, whether formal or 
informal (oral or written) to the extent they exist, with third parties 
to display the NMS Stock ATS's trading interest outside of the NMS 
Stock ATS, such as IOIs from the NMS Stock ATS's subscribers being 
displayed on vendor systems, or arrangements with third parties to 
transmit IOIs between subscribers.
---------------------------------------------------------------------------

    \466\ See supra note 123 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that when an NMS Stock ATS 
sends electronic messages outside of the NMS Stock ATS that expose the 
presence of orders or other trading interest on the NMS Stock ATS, it 
is displaying or making known orders or other trading interest on the 
NMS Stock ATS. For instance, an NMS Stock ATS may send to subscribers 
or other persons a direct data feed from the NMS Stock ATS that 
contains real-time information about current quotes, orders or other 
trading interest on the NMS Stock ATS. Accordingly, it would be 
responsive to this item for the NMS Stock ATS to disclose the 
circumstances under which the NMS Stock ATS would send these messages, 
the persons that received them, and the information contained in the 
messages, including the symbol or any other information relating to 
trading interest on the NMS Stock ATS. The NMS Stock ATS would need to 
disclose the information required by this item, including the exact 
content of the information, such as symbol, price, size, attribution, 
or any other information made known. The Commission preliminarily 
believes that disclosures in response to this item are important 
because the information disclosed would provide market participants 
with advance notice of the potential display of their orders or other 
trading interest outside of the NMS Stock ATS.\467\ The Commission 
preliminarily believes that market

[[Page 81073]]

participants, whose trading strategies are sensitive to how and to whom 
their orders and trading interest are displayed, would use the 
information disclosed under Item 6 to evaluate whether routing orders 
to a particular NMS Stock ATS would be consistent with their respective 
strategies.
---------------------------------------------------------------------------

    \467\ See Morgan Stanley letter, supra note 197 and accompanying 
text (stating customers questioned it about whether its dark pool is 
truly dark); Bloomberg Tradebook letter, supra note 190 and 
accompanying text (recommending that the Commission ask ATSs to 
complete a questionnaire that would include questions relating to 
the sharing of orders or order information with affiliates or other 
trading venues by the ATS).
---------------------------------------------------------------------------

Request for Comment
    379. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 6 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific
    380. Do you believe Part IV, Item 6 of proposed Form ATS-N captures 
the information that is most relevant to understanding the operations 
of the NMS Stock ATS related to the means and circumstances by which 
orders or other trading interest on the NMS Stock ATS are displayed or 
made known outside the NMS Stock ATS and the information about the 
orders and trading interest that are displayed? Please explain.
    381. What are the means through which NMS Stock ATSs currently 
display or make known trading interest? Do you believe any of these 
means raise any concerns? If so, why? Please support your arguments. Do 
you believe that Part IV, Item 6 of proposed Form ATS-N would mitigate 
any of those concerns through the disclosure of responsive information? 
Why or why not? Please support your arguments.
    382. Is it sufficiently clear what information would be required by 
Part IV, Item 6 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    383. Do you believe there is other information that market 
participants might find relevant or useful regarding orders or other 
trading interest on the NMS Stock ATS that are displayed or otherwise 
made known outside the NMS Stock ATS? If so, describe such information 
and explain whether, and if so why, such information should be required 
to be provided under proposed Form ATS-N. Please support your 
arguments.
    384. Do you believe there is any information that would be required 
by Part IV, Item 6 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    385. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 6 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 6 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    386. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 6 
of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part IV, Item 6?

G. Trading Services

    Part IV, Item 7(a) of proposed Form ATS-N would require an NMS 
Stock ATS to describe the means or facilities used by the NMS Stock ATS 
to bring together the orders of multiple buyers and sellers, including 
the structure of the market (e.g., crossing system, auction market, 
limit order matching book). If the use of these means or facilities are 
not the same for all subscribers and persons, the NMS Stock ATS would 
also be required to describe any differences.
    This item is primarily designed to inform market participants and 
the Commission about an NMS Stock ATS's market and the facilities and 
mechanisms that it uses to match counterparties. Part IV, Item 7(a) of 
proposed Form ATS-N would require a description, with specificity, of 
the facilities and mechanisms into which subscribers enter orders and 
how orders entered into these facilities and mechanisms would interact. 
The Commission has previously explained that a trading center brings 
together orders when orders entered into the system for a given 
security have the opportunity to interact with other orders entered 
into the system for the same security.\468\ For instance, a trading 
center brings together orders if it displays, or otherwise represents, 
trading interests entered on the system, such as a consolidated quote 
screen, to system users.\469\ Furthermore, a trading center also brings 
together orders if it receives subscribers' orders centrally for future 
processing and execution, such as part of a limit order matching book 
that allows subscribers to display buy and sell orders in particular 
securities and to obtain execution against matching orders 
contemporaneously entered or stored in the system.\470\ Additionally, 
as explained above, to qualify for the Rule 3a1-1(a)(2) exemption from 
the statutory definition of ``exchange,'' an ATS must bring together 
the orders of multiple buyers and sellers.\471\
---------------------------------------------------------------------------

    \468\ See Regulation ATS Adopting Release, supra note 7, at 
70849.
    \469\ See id.
    \470\ See id.
    \471\ See id. The Commission emphasized in the Regulation ATS 
Adopting Release that the mere interpositioning of a designated 
counterparty as riskless principal for settlement purposes after the 
purchasing and selling counterparties to a trade have been matched 
would not, by itself, mean that the system does not have multiple 
buyers and sellers. See id. Additionally, systems in which there is 
only a single seller, such as systems that permit issuers to sell 
their own securities to investors, would not be included within Rule 
3b-16. See id.
---------------------------------------------------------------------------

    Based on Commission experience, ATSs that trade NMS stocks use 
various types of trading mechanisms. For example, many ATSs bring 
together multiple buyers and sellers using limit order matching 
systems. Other ATSs use crossing mechanisms that allow participants to 
enter unpriced orders to buy and sell securities, with the ATS's system 
crossing orders at specified times at a price derived from another 
market.\472\ Some ATSs use an auction mechanism that matches multiple 
buyers and sellers by first pausing execution in a certain security for 
a set amount of time, during which the ATS's system seeks out and/or 
concentrates liquidity for the auction; after the trading pause, orders 
will execute at either a single auction price or according to the 
priority rules for the auction's execution. Furthermore, some ATSs use 
a blotter scraping functionality, which may inform the ATS's system 
about the orders placed on a participant's order management system, but 
not yet entered into the ATS; the ATS or broker-dealer operator 
oftentimes can automatically generate those orders and enter them into 
the ATS on behalf of the subscriber, in accordance with the relevant 
terms and conditions, when certain contra-side trading interest exists 
in the ATS.
---------------------------------------------------------------------------

    \472\ See Regulation ATS Adopting Release, supra note 7, at 
70849 n.37.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the disclosures required 
under Part IV, Item 7(a) would be useful to market participants when 
evaluating whether or not to route orders to a particular NMS Stock 
ATS. At times, market participants may route orders to a trading venue 
with certain characteristics to accomplish a particular trading 
strategy. For instance, a market participant aiming to execute a block 
transaction may seek out a trading platform that operates a block 
crossing network with specialized size discovery mechanisms and 
controls for information leakage. At the same time, a different market 
participant may seek to use an NMS Stock ATS's auction

[[Page 81074]]

function if that market participant believes the auction process would 
provide the best opportunity for price discovery or price improvement. 
Accordingly, the Commission preliminarily believes that disclosure of 
the information that would be required under Item 7(a) of proposed Form 
ATS-N would better enable market participants to evaluate an NMS Stock 
ATS as a potential destination for them to route their orders. In 
addition, this information also would assist the Commission to fully 
evaluate the facilities and mechanisms that consist of the NMS Stock 
ATS and whether an NMS Stock ATS meets the requirements of Rule 3b-16 
that it is bringing together the orders for securities of multiple 
buyers and sellers.\473\
---------------------------------------------------------------------------

    \473\ See 17 CFR 240.3b-16(a)(1).
---------------------------------------------------------------------------

Request for Comment
    387. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 7(a) of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    388. Do you believe Part IV, Item 7(a) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the means or facilities used 
by the NMS Stock ATS to bring together the orders of multiple buyers 
and sellers, including the structure of the market? Please explain.
    389. Is it sufficiently clear what information would be required by 
Part IV, Item 7(a) of proposed Form ATS-N? Should the item be refined 
in any way? If so, how? Please be specific.
    390. Do you believe there is other information that market 
participants might find relevant or useful regarding the means or 
facilities used by the NMS Stock ATS to bring together the orders of 
multiple buyers and sellers? If so, describe such information and 
explain whether, and if so why, such information should be required to 
be provided under proposed Form ATS-N. Please support your arguments.
    391. Do you believe there is any information that would be required 
by Part IV, Item 7(a) of proposed Form ATS-N that an NMS Stock ATS 
should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    392. Are there particular means or facilities for bringing together 
the orders of multiple buyers and sellers on which the Commission 
should request information specifically that is not included as a 
component under Part IV, item 7(a) of proposed Form ATS-N?
    393. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 7(a) of proposed Form ATS-N? 
Would the proposed disclosures in Part IV, Item 7(a) of proposed Form 
ATS-N require an NMS Stock ATS to reveal too much (or not enough) 
information about its structure and operations? Why or why not? Please 
support your arguments.
    394. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
7(a) of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 7(a)?
    Part IV, Item 7(b) of Form ATS-N would require an NMS Stock ATS to 
describe the established, non-discretionary methods that dictate the 
terms of trading among multiple buyers and sellers on the facilities of 
the NMS Stock ATS, including rules and procedures governing the 
priority, pricing methodologies, allocation, matching, and execution of 
orders and other trading interest. If these rules and procedures are 
not the same for all subscribers and persons, the NMS Stock ATS would 
be required to describe any differences.
    Part IV, Item 7(b) of proposed Form ATS-N is primarily designed to 
inform market participants about how orders interact on an NMS Stock 
ATS upon being entered into the system. Item 7(b) would require a 
description, with specificity, of all rules and procedures relevant to 
order interaction and execution, such as those addressing order 
priority, pricing methodologies, allocation, matching, and execution of 
orders and other trading interest. The Commission previously explained 
in the Regulation ATS Adopting Release that use of established, non-
discretionary methods could include operation of a trading facility or 
the setting of rules governing the trading of subscribers.\474\ For 
example, the Commission considers the use of an algorithm by an 
electronic trading system, which sets trading procedures and 
priorities, to be a trading facility that uses established, non-
discretionary methods.\475\ Similarly, the Commission has previously 
stated that rules imposing execution priorities, such as time and price 
priority rules, would be ``established, non-discretionary methods.'' 
\476\
---------------------------------------------------------------------------

    \474\ See Regulation ATS Adopting Release, supra note 7, at 
70851-52.
    \475\ See id. at 70851.
    \476\ See id. at 70852.
---------------------------------------------------------------------------

    Based on Commission experience, NMS Stocks ATSs employ various 
terms and conditions under which orders interact and match. As noted 
above, some NMS Stock ATSs may offer price-time priority to determine 
how to match orders (potentially with various exceptions), while other 
NMS Stock ATSs may offer midpoint-only matching with time 
priority.\477\ Some NMS Stock ATSs might also take into account other 
factors to determine priority. For example, an NMS Stock ATS may assign 
either a lower or higher priority to an order entered by a subscriber 
in a certain class (e.g., orders of proprietary traders or retail 
investors) or routed from a particular source (e.g., orders routed by 
the broker-dealer operator's SOR (or similar functionality) or 
algorithm) when compared to an equally priced order entered by a 
different subscriber or via a different source. Furthermore, in the 
Commission's experience, an NMS Stock ATS might elect to apply 
different priority rules for matching conditional orders than it does 
for matching other order types.
---------------------------------------------------------------------------

    \477\ See supra Section III.B.
---------------------------------------------------------------------------

    Part IV, Item 7(c) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any trading procedures related to price 
protection mechanisms, short sales, locked-crossed markets, the 
handling of execution errors, time-stamping of orders and executions, 
or price improvement functionality. If the trading procedures are not 
the same for all subscribers and persons, the NMS Stock ATS would also 
be required to describe any differences. Some ATSs that trade NMS 
stocks apply various methods to determine an execution price based on 
the circumstances of the match. For example, an ATS may price an 
execution of a midpoint pegged order with a limit or market order at 
the midpoint of the NBBO. An ATS executing a match of two limit orders, 
or a limit and market order, might price the execution at or within the 
NBBO, with the possibility of offering the limit order(s) price 
improvement. On the other hand, an ATS that operates a block crossing 
network, with specialized size discovery mechanisms, might calculate a 
volume-weighted average price after the final size of the execution has 
been determined.
    In the Commission's experience, NMS Stock ATSs have also adopted 
other trading procedures governing the execution of orders, which the 
NMS Stock ATS would be required to explain under Part IV, Item 7(c) of 
proposed

[[Page 81075]]

Form ATS-N. For instance, an NMS Stock ATS might elect to use price 
protections to re-price orders or prevent their execution under certain 
circumstances, such as Limit Up Limit Down price bands pursuant to the 
National Market System Plan to Address Extraordinary Market Volatility 
(``LULD Plan'').\478\ An NMS Stock ATS might also permit short sales to 
be executed on its system and would thus be required to configure its 
system to comply with federal securities laws related to short sales, 
including Regulation SHO.\479\ Additionally, an NMS Stock ATS could 
have rules and procedures governing and/or precluding the execution of 
orders in a locked or crossed market. If an NMS Stock ATS has any 
procedures governing the handling of execution errors, such as the use 
of an error account by the NMS Stock ATS, it would be required to 
explain those procedures in Item 7(c).
---------------------------------------------------------------------------

    \478\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (``LULD Approval 
Order''). The registered national securities exchanges and FINRA 
filed the LULD Plan to create a market-wide limit up-limit down 
mechanism to address extraordinary market volatility in NMS Stocks. 
See id. at 33500. The Plan sets forth procedures that provide for 
market-wide limit up-limit down requirements that would be designed 
to prevent trades in individual NMS Stocks from occurring outside of 
the specified price bands. See id.
    \479\ 17 CFR 242.200 through 242.204.
---------------------------------------------------------------------------

    Furthermore, under Part IV, Item 7(c) of proposed Form ATS-N, an 
NMS Stock ATS would also be required to describe any protocols for 
time-stamping orders and executions to ensure compliance with the 
Exchange Act and the rules and regulations thereunder and any execution 
procedures related to price improvement. For example, if an NMS Stock 
ATS has procedures to reprice orders under its price protection 
mechanisms, to reprice short sale orders to ensure compliance with 
Regulation SHO, or to reprice orders due to price-sliding order types 
(such as certain pegged order types), it would be required to explain 
when it creates new timestamps for such re-priced orders.\480\ In 
addition, any functionality or mechanism available on the NMS Stock ATS 
that allows for price improvement would also need to be described in 
response to this item.
---------------------------------------------------------------------------

    \480\ Additionally, if subscriber orders are routed from the NMS 
Stock ATS and are not filled, or filled only in part on the NMS 
Stock ATS, the Commission preliminarily believes that the NMS Stock 
ATS should describe how such orders are time stamped for priority 
purposes.
---------------------------------------------------------------------------

    The Commission preliminarily believes that information about how an 
NMS Stock ATS prices and matches orders is useful to market 
participants' and the Commission's understanding of that trading 
center's operation. The Commission preliminarily believes that the 
information required under Part IV, Items 7(b) and 7(c) of proposed 
Form ATS-N would allow market participants to evaluate the terms and 
conditions under which their orders will interact and execute on an NMS 
Stock ATS, and would thus provide them with a better opportunity to 
determine whether that NMS Stock ATS is the appropriate trading 
destination for their orders. For example, a market participant whose 
order would be given a higher priority on an NMS Stock ATS based on its 
subscriber class may choose to first route its order to that venue, 
whereas a market participant seeking to enter a conditional order may 
choose to route an order based on an NMS Stock ATS's specific priority 
rules governing conditional orders. Likewise, market participants 
likely would want to know whether an NMS Stock ATS applies price 
protection mechanisms, or other standards, that could re-price an order 
or prevent it from executing under certain conditions. In addition, the 
Commission preliminarily believes that the information provided in 
response to Items 7(a), 7(b), and 7(c) would allow the Commission to 
more easily evaluate whether the entity that filed the proposed Form 
ATS-N meets the criteria of Rule 3b-16 and the definition of an NMS 
Stock ATS.
Request for Comment
    395. Do you believe the Commission should require the disclosure of 
the information on Part IV, Items 7(b) and 7(c) of Form ATS-N? Why or 
why not? If so, what level of detail should be disclosed? Please be 
specific.
    396. Do you believe Part IV, Item 7(b) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS related to the established, non-
discretionary methods that dictate the terms of trading among multiple 
buyers and sellers on the facilities of the NMS Stock ATS, including 
rules and procedures governing the priority, pricing methodologies, 
allocation, matching, and execution of orders and other trading 
interest? Please explain.
    397. Do you believe Part IV, Item 7(c) of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding the trading procedures 
related to price protection mechanisms, short sales, locked-crossed 
markets, the handling of execution errors, time-stamping of orders and 
executions, or price improvement functionality? Please explain.
    398. Is it sufficiently clear what information would be required by 
Part IV, Items 7(b) and 7(c) of proposed Form ATS-N? Should these items 
be refined in any way? If so, how? Please be specific.
    399. Do you believe there is other information that market 
participants might find relevant or useful regarding the established 
non-discretionary methods that dictate the terms of trading among 
multiple buyers and sellers on the market or facilities of an NMS Stock 
ATS? If so, describe such information and explain whether, and if so 
why, such information should be required to be provided under proposed 
Form ATS-N. Please support your arguments.
    400. Do you believe there is other information that market 
participants might find relevant or useful regarding trading procedures 
related to price protection mechanisms, short sales, locked-crossed 
markets, the handling of execution errors, time-stamping of orders and 
executions, or price improvement functionality on an NMS Stock ATS? If 
so, describe such information and explain whether, and if so why, such 
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
    401. Do you believe there is any information that would be required 
by Part IV, Items 7(b) and 7(c) of proposed Form ATS-N that an NMS 
Stock ATS should not be required to disclose due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? Why or why not? Please support your arguments.
    402. Are there any aspects of the non-discretionary methods that 
dictate the terms of trading among buyers and sellers on which the 
Commission should specifically require information that is not included 
as a component under Part IV, Item 7(b) of proposed Form ATS-N?
    403. What are the potential costs and benefits of disclosing the 
information required by Part IV, Items 7(b) and 7(c) of proposed Form 
ATS-N? Would the proposed disclosures in Part IV, Items 7(b) and 7(c) 
of proposed Form ATS-N require an NMS Stock ATS to reveal too much (or 
not enough) information about its structure and operations? Why or why 
not? Please support your arguments.
    404. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Items 
7(b) and 7(c) of proposed Form ATS-N other than through disclosure on 
proposed Form

[[Page 81076]]

ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part IV, Items 7(b) and 7(c)?

H. Suspension of Trading, System Disruption or Malfunction

    Part IV, Item 8 of proposed Form ATS-N would require an NMS Stock 
ATS to describe any procedures governing trading in the event the NMS 
Stock ATS suspends trading or experiences a system disruption or 
malfunction. In addition, if the procedures governing trading during a 
suspension or system disruption or malfunction are not the same for all 
subscribers and persons, the NMS Stock ATS would be required to 
describe any differences. This item is designed to inform market 
participants of whether, among other things, an NMS Stock ATS will 
continue to accept orders after suspension or system malfunction or 
disruption occurs, whether the NMS Stock ATS routes, holds, or 
continues to execute orders resting in the system prior to the 
disruption, and the type of notice the NMS Stock ATS provides to 
subscribers and other market participants during a suspension or system 
disruption or malfunction. Examples of system disruptions would 
include, but are not limited to, internal software problems that 
prevent the NMS Stock ATS's system from opening or continuing 
trading,\481\ a significant increase in volume that exceeds the ability 
of the trading system of the NMS Stock ATS to process incoming 
orders,\482\ and the failure of the ability of the trading system of 
the NMS Stock ATS to receive NBBO or other external pricing information 
that is used in the system's pricing methodology.
---------------------------------------------------------------------------

    \481\ See SCI Adopting Release, supra note 17 at 72254-55 n.28.
    \482\ See id. at 72255 n.29.
---------------------------------------------------------------------------

    The Commission preliminarily believes that information regarding an 
NMS Stock ATS's procedures on how orders may be handled during a 
suspension of trading or system disruption or malfunction would be 
useful to market participants because such an event might preclude the 
NMS Stock ATS from accepting and/or executing time sensitive orders and 
could impact the price the subscriber receives. The information about 
how an NMS Stock ATS would handle orders under such circumstances would 
better inform a subscriber's trading decisions at the time of such an 
event and thus help that subscriber accomplish its investing or trading 
objectives.
    Information regarding the procedures for how an NMS Stock ATS would 
handle orders during a suspension of trading or system disruption or 
malfunction would also help the Commission better monitor the 
securities markets. The Commission has recently noted that given the 
speed and interconnected nature of the U.S. securities markets, a 
seemingly minor systems problem at a single entity can quickly create 
losses and liability for market participants, and spread rapidly across 
the national market system, potentially creating widespread damage and 
harm to market participants and investors.\483\ Accordingly, it is 
important to fully understand what, if any, trading procedures an NMS 
Stock ATS would follow during a suspension of trading or system 
disruption or malfunction. The Commission preliminarily believes that 
the disclosures that would be required by Item 8 would help the 
Commission discover a potential violation of the federal securities 
laws and rules or regulations thereunder in a more expeditious manner 
than if the disclosures were not required. The Commission notes that it 
is not proposing to require NMS Stock ATSs to adopt specific procedures 
governing trading during a system disruption or malfunction as it did 
under Regulation SCI for certain significant-volume ATSs that trade NMS 
stocks or non-NMS stocks.\484\ Rather, under Part IV, Item 8 of 
proposed Form ATS-N, the Commission is only requiring an NMS Stock ATS 
to disclose what procedures, if any, it follows during a suspension of 
trading or system disruption or malfunction on the NMS Stock ATS. 
Accordingly, the disclosure requirements under Item 8, similar to other 
items on proposed Form ATS-N, are intended to inform market 
participants of an NMS Stock ATS's procedures rather than impose any 
new procedural requirements on NMS Stock ATSs.
---------------------------------------------------------------------------

    \483\ See id. at 72253.
    \484\ See supra notes 102-103 and accompanying text.
---------------------------------------------------------------------------

Request for Comment
    405. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 8 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    406. Do you believe Part IV, Item 8 of proposed Form ATS-N captures 
the information that is most relevant to understanding the operations 
of the NMS Stock ATS regarding any procedures governing trading in the 
event the NMS Stock ATS suspends trading or experiences a system 
disruption or malfunction? Please explain.
    407. Is it sufficiently clear what information would be required by 
Part IV, Item 8 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    408. Do you believe there is other information that market 
participants might find relevant or useful regarding procedures 
governing trading in the event an NMS Stock ATS suspends trading or 
experiences a system disruption or malfunction? If so, describe such 
information and explain whether, and if so why, such information should 
be required to be provided under proposed Form ATS-N. Please support 
your arguments.
    409. Do you believe there is any information that would be required 
by Part IV, Item 8 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    410. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 8 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 8 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    411. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 8 
of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part IV, Item 8?

I. Opening, Reopening, and Closing Processes, and After Hours 
Procedures

    Part IV, Item 9 of proposed Form ATS-N would require an NMS Stock 
ATS to describe its opening, reopening, and closing processes, if any, 
and any after-hours trading procedures. Part IV, Item 9(a) of proposed 
Form ATS-N would require an NMS Stock ATS to describe any opening and 
reopening processes, including how orders or other trading interest are 
matched and executed prior to the start of regular trading hours or 
following a stoppage of trading in a security during regular trading 
hours and how unexecuted orders or other trading interest are

[[Page 81077]]

handled at the time the NMS Stock ATS begins regular trading at the 
start of regular trading hours or following a stoppage of trading in a 
security during regular trading hours. An NMS Stock ATS would also be 
required to describe any differences between pre-opening executions, 
executions following a stoppage of trading in a security during regular 
trading hours, and executions during regular trading hours. Part IV, 
Item 9(b) of proposed Form ATS-N would require a description of any 
closing process, including how unexecuted orders or other trading 
interest are handled at the close of regular trading. An NMS Stock ATS 
would also be required to describe any differences between the closing 
executions and executions during regular trading hours. Part IV, Item 
9(c) of proposed Form ATS-N would require a description of any after-
hours trading procedures, including how orders and trading interest are 
matched and executed during after-hours trading. An NMS Stock ATS would 
also be required to describe any differences between the after-hours 
executions and executions during regular trading hours.
    Part IV, Item 9 of proposed Form ATS-N is designed to inform market 
participants about whether an NMS Stock ATS uses any special procedures 
to match orders outside of regular trading hours and/or processes to 
set a single opening, reopening, or closing price to, for example, 
maximize liquidity and accurately reflect market conditions at the 
opening, reopening, or close of trading. The Commission notes that it 
is standard practice for national securities exchanges to conduct 
opening, reopening, and closing auctions, or similar procedures, to 
start and conclude the trading day, or reopen trading in a security 
during the trading day.\485\ Furthermore, to facilitate their opening 
and closing processes, exchanges often permit members to enter orders 
specially designated to execute on the opening or closing.\486\ The 
disclosures under this item would allow for comparisons between NMS 
Stock ATSs and exchanges.
---------------------------------------------------------------------------

    \485\ See, e.g., New York Stock Exchange Rule 123D (setting 
forth the duties of NYSE Designated Market Maker when opening and 
reopening trading in a stock); New York Stock Exchange Rule 123C 
(setting forth the exchange's closing procedures); The Nasdaq Stock 
Market LLC Rule 4752 (setting forth rules for the Nasdaq Opening 
Cross); The Nasdaq Stock Market LLC Rule 4753 (setting forth rules 
for the Nasdaq Halt Cross); The Nasdaq Stock Market LLC Rule 4754 
(setting forth rules for the Nasdaq Closing Cross); BATS Exchange 
Rules 11.23 and 11.24 (setting forth the exchange's procedures for 
openings, closings and auctions following a trading halt).
    \486\ See, e.g., New York Stock Exchange Rule 13 (defining 
Market-on-Open. Market-on-Close, Limit-on-Open, and Limit-on-Close, 
and Closing Offset order types); The Nasdaq Stock Market LLC Rule 
4752 (a) (defining Market on Open, Limit on Open, Opening Imbalance 
Only, and Market Hours order types); The Nasdaq Stock Market LLC 
Rule 4754(a) (defining Market on Close, Limit on Close, and 
Imbalance Only order types); BATS Exchange Rule 11.23(a) (defining 
Eligible Auction, Market-on-Open, Limit-on-Open, Late-Limit-on-Open, 
Market-on-Close, Limit-on-Close, and Late Limit-on-Close order 
types).
---------------------------------------------------------------------------

    Market participants would likely want to know about any special 
opening, reopening, or closing processes, and after-hours trading 
procedures, employed by an NMS Stock ATS. In particular, the Commission 
preliminarily believes that market participants would want to know 
which, if any, order types participate in an NMS Stock ATS's opening, 
reopening, and/or closing processes, and after-hours trading. The 
Commission preliminarily believes that such information would help 
market participants assess whether participating in an NMS Stock ATS's 
opening, reopening, or closing processes, or after-hours trading on the 
NMS Stock ATS, would help accomplish their investing or trading 
objectives and thus, cause them to route orders to the NMS Stock ATS.
    The disclosures required under Part IV, Item 9 of proposed Form 
ATS-N are also designed to help the Commission to better oversee NMS 
Stock ATSs and alert the Commission about any potential regulatory 
issues arising from an NMS Stock ATS's opening, reopening, or closing 
processes, or after-hours trading procedures. For example, under Rule 
611(b)(3) of Regulation NMS,\487\ single-priced opening and closing 
transactions are excepted from the Order Protection Rule under Rule 
611(a) of Regulation NMS.\488\ The Commission preliminarily believes 
the disclosures required under Part IV, Item 9 of proposed Form ATS-N 
would help the Commission analyze whether the opening, reopening, and/
or closing processes of an NMS Stock ATS, and after-hours trading 
procedures, are consistent with the Exchange Act and the rules and 
regulations thereunder.
---------------------------------------------------------------------------

    \487\ See 17 CFR 242.611(b)(3).
    \488\ See 17 CFR 242.611(a).
---------------------------------------------------------------------------

Request for Comment
    412. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 9 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    413. Do you believe Part IV, Item 9 of proposed Form ATS-N captures 
the information that is most relevant to understanding the operations 
of the NMS Stock ATS regarding its opening, reopening, or closing 
processes, if any, and any after-hours trading procedures? Please 
explain.
    414. Do you believe there is other information that market 
participants might find relevant or useful regarding the opening or 
reopening processes, closing process, or after-hours trading procedures 
on the NMS Stock ATS? If so, describe such information and explain 
whether, and if so why, such information should be required to be 
provided under proposed Form ATS-N. Please support your arguments.
    415. Is it sufficiently clear what information would be required by 
Part IV, Item 9 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    416. Do you believe there is any information that would be required 
by Part IV, Item 9 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    417. Do you believe the information that would be required by Part 
IV, Item 9 of proposed Form ATS-N would be useful to market 
participants when deciding whether to trade on the NMS Stock ATS and 
would assist them in devising appropriate trading strategies to help 
accomplish their investing or trading objectives? Why or why not? 
Please support your arguments.
    418. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 9 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 9 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    419. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 9 
of proposed Form ATS-N other than through disclosure on proposed Form 
ATS-N? If so, how else could this information be obtained and would 
such alternative means be preferable to the proposed disclosures in 
Part IV, Item 9?

J. Outbound Routing

    Part IV, Item 10(a) of Proposed Form ATS-N would require an NMS 
Stock ATS to describe the circumstances under which orders or other 
trading interest are routed from the NMS Stock ATS to another trading 
center, including whether outbound routing occurs at the

[[Page 81078]]

affirmative instruction of the subscriber or at the discretion of the 
broker-dealer operator, and the means by which routing is performed 
(e.g., a third party or order management system or a SOR (or similar 
functionality) or algorithm of the broker-dealer operator or any of its 
affiliates). If the means by which orders or other trading interest are 
routed from the NMS Stock ATS are not the same for all subscribers and 
persons, the NMS Stock ATS would be required to describe any 
differences under Part IV, Item 10(b) of proposed Form ATS-N.
    Based on Commission experience, some NMS Stock ATSs, by way of 
their broker-dealer operator, provide outbound routing services whereby 
a subscriber's order or trading interest could be routed to another 
trading center.\489\ Orders and trading interest could be routed to 
other trading centers under a variety of circumstances. For instance, a 
subscriber could instruct the NMS Stock ATS to route its orders to 
another trading center if it is not immediately executed on the NMS 
Stock ATS upon entry. Also, a subscriber could enter an order on the 
NMS Stock ATS that rests as an open order on the NMS Stock ATS and is 
concurrently routed to another trading center for potential execution. 
If the order is executed at the away trading center, the NMS Stock ATS 
would cancel the order resting as an open order on the NMS Stock ATS. 
If the order is executed on the NMS Stock ATS, the order that was 
routed to the away market would be canceled.
---------------------------------------------------------------------------

    \489\ ``Trading center'' under Regulation NMS is defined as ``a 
national securities exchange or national securities association that 
operates an SRO trading facility, an alternative trading system, 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).
---------------------------------------------------------------------------

    The descriptions in response to Part IV, Item 10 of proposed Form 
ATS-N would be required to include who determines routing destinations, 
whether the subscriber, the broker-dealer operator, or both. This 
information is meant to illuminate when subscribers would have control 
over potential routing destinations and when the broker-dealer operator 
would have discretion to route away. The Commission preliminarily 
believes that subscribers would find it useful to be aware of any 
instance in which the broker-dealer operator has discretion to route 
trading interest so that a subscriber could better protect its 
interests and monitor any such routing. Item 10 of proposed Form ATS-N 
would also require a description of the means by which the routing is 
performed. Examples of the means of outbound routing could include a 
third-party router, an order management system or SOR (or similar 
functionality) or algorithm of the broker-dealer operator or any of its 
affiliates, or any other functionality used to outbound route trading 
interest.
    The Commission preliminarily believes that it is important for 
subscribers and potential subscribers to know at whose discretion any 
outbound routing occurs and who would be performing the routing. The 
Commission preliminarily believes that such disclosures concerning 
outbound routing would provide subscribers and potential subscribers 
with the ability to gauge how their orders would be handled if they are 
not executed on the NMS Stock ATS. Subscribers and potential 
subscribers might, for example, have concerns about the leakage of 
confidential trading information when their orders are routed to other 
trading centers. Part IV, Item 10 of proposed Form ATS-N is designed to 
provide subscribers and potential subscribers with relevant information 
to evaluate the potential for leakage of their confidential trading 
information. In addition, subscribers and potential subscribers could 
have concerns about the treatment of their confidential trading 
information should their orders be routed by a third party or the SOR 
(or similar functionality) or algorithm of the broker-dealer operator. 
Overall, the Commission preliminarily believes that information about 
routing would likely be useful to market participants when deciding 
whether to subscribe or otherwise submit orders to an NMS Stock ATS 
that might be eligible for routing.
    The Commission also preliminarily believes that the disclosures 
required by Part IV, Item 10 of proposed Form ATS-N would aid it in 
evaluating whether an NMS Stock ATS is in compliance with Rule 
301(b)(10) of Regulation ATS.\490\ The Commission could use the 
disclosures required under Item 10 of proposed Form ATS-N to evaluate 
whether there are any risks to the confidentiality of trading 
information on an NMS Stock ATS due to the outbound routing 
functionality being used. These disclosures would provide the 
Commission with insight into what trading information may be visible to 
the entity performing the NMS Stock ATS's outbound routing functions, 
such as a third party or the broker-dealer operator's SOR (or similar 
functionality) or algorithm.
---------------------------------------------------------------------------

    \490\ See 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

Request for Comment
    420. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 10 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    421. Do you believe Part IV, Item 10 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding the circumstances under which 
orders or other trading interest are routed from the NMS Stock ATS to 
another trading center? Please explain.
    422. Is it sufficiently clear what information would be required by 
Part IV, Item 10 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    423. What mechanisms are available for NMS Stock ATSs to perform 
outbound routing? Do you believe there is any additional information 
that the Commission should require NMS Stock ATSs to disclose with 
regard to outbound routing? If so, explain what information and why. 
Please support your arguments.
    424. Do you believe there is any information that would be required 
by Part IV, Item 10 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    425. Do you believe that the disclosures required under Part IV, 
Item 10 of proposed Form ATS-N would provide market participants with 
relevant information to evaluate the potential for leakage of their 
confidential trading information? Why or why not? Please be specific.
    426. Do you believe transparency in how an NMS Stock ATS routes 
orders to other trading centers is useful to market participants when 
deciding whether to trade on the NMS Stock ATS and would assist them in 
devising appropriate trading strategies to help accomplish their 
investing or trading objectives? Why or why not?
    427. Do you believe there is other information that market 
participants might find relevant or useful regarding the circumstances 
under which orders or other trading interest are routed from the NMS 
Stock ATS to another trading center? If so, describe such information 
and explain whether, and if so why, such information should be required 
to be provided under proposed Form ATS-N. Please support your 
arguments.
    428. What are the potential costs and benefits of disclosing the 
information

[[Page 81079]]

required by Part IV, Item 10 of proposed Form ATS-N? Would the proposed 
disclosures in Part IV, Item 10 of proposed Form ATS-N require an NMS 
Stock ATS to reveal too much (or not enough) information about its 
structure and operations? Why or why not? Please support your 
arguments.
    429. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
10 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 10?

K. Market Data

    Part IV, Item 11 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose its sources and use of market data. Part IV, Item 11(a) 
of proposed Form ATS-N would require a description of the market data 
used by the NMS Stock ATS and the source of that market data (e.g., 
market data feeds disseminated by the consolidated data processor 
(``SIP'') and market data feeds disseminated directly by an exchange or 
other trading center or third-party vendor of market data). Part IV, 
Item 11(b) of proposed Form ATS-N would require the NMS Stock ATS to 
describe the specific purpose for which the market data is used by the 
NMS Stock ATS, including how market data is used to determine the NBBO, 
protected quotes, pricing of orders and executions, and routing 
destinations. For instance, an NMS Stock ATS can elect to use market 
data feeds for purposes of complying with the trade through rule of 
Rule 611 of Regulation NMS \491\ and for pricing executions on the NMS 
Stock ATS that are derived from prices on other trading centers, such 
as an execution at the mid-point of the NBBO. An NMS Stock ATS also 
might use data feeds to determine the prices available at other trading 
centers for purposes of routing orders or other trading interest.
---------------------------------------------------------------------------

    \491\ See 17 CFR 242.611(a).
---------------------------------------------------------------------------

    The Commission preliminarily believes that market participants 
would likely find it useful to know the source and specific purpose for 
which market data is used by an NMS Stock ATS. For instance, the market 
data received by an NMS Stock ATS might affect the price at which 
orders are executed on the NMS Stock ATS.\492\ In addition, because of 
the latency differences between the SIP and the direct data feeds of 
the exchanges,\493\ the source of an NMS Stock ATS's market data could 
impact the price received by a market participant, depending on the 
ATS's source of the market data. Accordingly, the Commission 
preliminarily believes that Part IV, Item 11 of proposed Form ATS-N 
would provide market participants with information to assist them in 
developing optimal trading strategies to account for any potential 
latency differences between market data feeds. Furthermore, the 
Commission preliminarily believes that these disclosures would assist 
subscribers to understand the procedures employed by the NMS Stock ATS 
for complying with Regulation NMS, including an understanding about how 
their orders might be routed by the NMS Stock ATS. The Commission also 
preliminarily believes that the disclosures required under Item 11 
could help the Commission in understanding how market data is used for 
purposes of monitoring developments in market structure.
---------------------------------------------------------------------------

    \492\ See supra Section VIII.G (explaining how NMS Stock ATSs 
might use the NBBO to set execution prices). See also Morgan Stanley 
letter, supra note 197, (stating it received customer questions 
specific to the use of direct market data feeds by the dark pool's 
servers and algorithmic strategies).
    \493\ See 2010 Equity Market Structure Release, supra note 124, 
at 3611 (``Given the extra step required for SROs to transmit market 
data to plan processors, and for plan processors to consolidate the 
information and distribute it the public, the information in the 
individual data feeds of exchanges and ECNs generally reaches market 
participants faster than the same information in the consolidated 
data feeds.'').
---------------------------------------------------------------------------

Request for Comment
    430. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 11 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    431. Do you believe Part IV, Item 11 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding the sources and use of market 
data? Please explain.
    432. Is it sufficiently clear what information would be required by 
Part IV, Item 11 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    433. Do you believe there is other information that market 
participants might find relevant or useful regarding the sources and 
use of market data? If so, describe such information and explain 
whether, and if so why, such information should be required to be 
provided under proposed Form ATS-N. Please support your arguments.
    434. Do you believe there is any information that would be required 
by Part IV, Item 11 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    435. Are there any other applications for which NMS Stock ATSs use 
market data that the Commission should specifically identify and/or 
discuss under Part IV, Item 11 of Proposed Form ATS-N?
    436. Do you believe that transparency regarding what market data an 
NMS Stock ATS uses and how the NMS Stock ATS uses that market data is 
useful to market participants when deciding whether to trade on the NMS 
Stock ATS and would assist them in devising appropriate trading 
strategies to help accomplish their investing or trading objectives? 
Why or why not?
    437. Do you believe that the disclosures required under Part IV, 
Item 11 of Proposed Form ATS-N would assist the Commission to 
understand the procedures employed by an NMS Stock ATS for complying 
with Regulation NMS and to understand how orders are priced, handled, 
and routed by the NMS Stock ATS? Why or why not?
    438. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
11 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 11?
    439. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 11 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 11 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.

L. Fees

    Part IV, Item 12 of proposed Form ATS-N would require the NMS Stock 
ATS to disclose and describe its fee and rebate structure. Part IV, 
Item 12(a) of proposed Form ATS-N would require an NMS Stock ATS to 
describe any fees, rebates, or other charges of the NMS Stock ATS 
(e.g., connectivity fees, subscription fees, execution fees, volume 
discounts) and provide the range (e.g., high and low) of such fees, 
rebates, or other charges. If the fees, rebates, or other charges of 
the NMS Stock ATS are not the same for all subscribers and persons, the 
NMS Stock

[[Page 81080]]

ATS would be required to describe any differences under Part IV, Item 
12(b) of proposed Form ATS-N.
    The Commission preliminarily believes that by requiring a 
description of an NMS Stock ATS's fees, rebates, and other charges, 
market participants would be able to review and evaluate the fee 
structure of each NMS Stock ATS. If an NMS Stock ATS has a recognized 
fee structure, such as a maker-taker pricing model,\494\ that 
information would be required to be disclosed under Part IV, Item 12 of 
proposed Form ATS-N. The Commission preliminarily believes these 
disclosures would allow market participants to analyze the fee 
structures across NMS Stock ATSs in an expedited manner and decide 
which ATS offers them the best pricing according to the characteristics 
of their order flow, the type of participant they are (if relevant), or 
any other aspects of an ATS's fee structure that serves to provide 
incentivizes or disincentives for specific market participants or 
trading behaviors. For instance, an institutional subscriber that 
commonly adds non-marketable, resting orders that offer liquidity may 
choose to subscribe to an ATS that rewards liquidity-providing orders 
with rebates. The types of fees charged for services also could 
influence whether a market participant subscribes to, or the extent to 
which it participates on, an NMS Stock ATS. For instance, an NMS Stock 
ATS with relatively higher connectivity fees and relatively lower 
execution fees may not be as attractive to a market participant that 
only intends to send the NMS Stock ATS a small amount of trading 
interest.
---------------------------------------------------------------------------

    \494\ Under the maker-taker pricing model, non-marketable, 
resting orders that offer (make) liquidity at a particular price 
receive a liquidity rebate if they are executed, while incoming 
orders that execute against (take) the liquidity of resting orders 
are charged an access fee. See 2010 Equity Market Structure Release, 
supra note 124, at 3598-3599.
---------------------------------------------------------------------------

    The Commission also is proposing to require that NMS Stock ATSs 
describe any differences in their fees, rebates, or other charges among 
differing types of subscribers or other persons. The Commission 
preliminarily believes that this information would further illuminate 
the types of subscribers and/or trading interest that the NMS Stock ATS 
may be trying to attract.\495\ This information would allow market 
participants to observe whether an NMS Stock ATS is offering more 
preferential treatment to other market participants and, therefore, aid 
market participants in deciding where to route their trading interest 
accordingly.\496\
---------------------------------------------------------------------------

    \495\ See Bloomberg Tradebook letter, supra note 190 and 
accompanying text (recommending that the Commission ask ATSs to 
complete a questionnaire including questions relating to any special 
fees or rebates which lead to a preference of one order over 
another).
    \496\ But see supra notes 92-95 and 427-429 and accompanying 
text (discussing the fair access requirements of Regulation ATS).
---------------------------------------------------------------------------

    Part IV, Item 12 of proposed Form ATS-N also would require that the 
NMS Stock ATS provide the range (e.g., high and low) of such fees, 
rebates, or other charges. For these disclosures, the types of fees 
should be categorized in the same manner as the NMS Stock ATS divides 
fees internally or on its fee schedule. For example, if an NMS Stock 
ATS provides rebates for liquidity added onto the ATS, then the range 
for such rebates would be required by this item. If these rebates are 
further divided into differing rebate amounts depending on order types 
used, then the range of such rebates for each order type would also 
need to be disclosed on proposed Form ATS-N.
    Item 12, however, does not require NMS Stock ATSs to disclose a 
complete schedule of their fees. In some cases, the fee schedules 
employed by NMS Stock ATSs are highly bespoke, and it may not be 
practical or desirable to require an NMS Stock ATS to disclose the fee 
schedule applicable to each subscriber to the NMS Stock ATS. The 
Commission, therefore, is proposing that the NMS Stock ATS disclose 
only the range of fees for each service. These disclosures are designed 
to give market participants an awareness of the fees charged by the NMS 
Stock ATS and allow market participants to understand and compare fees 
across NMS Stock ATSs, which could reduce the search costs of market 
participants in deciding where to send their orders and trading 
interest. The Commission preliminarily believes that the disclosures 
required by Part IV, Item 12 of proposed Form ATS-N would also assist 
the Commission in better understanding the fee structures of NMS Stock 
ATSs and trends in the market as part of the Commission's overall 
review of market structure.
Request for Comment
    440. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 12 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    441. Do you believe Part IV, Item 12 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding its fee and rebate structure? 
Please explain.
    442. Is it sufficiently clear what information would be required by 
Part IV, Item 12 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    443. Do you believe the Commission should require NMS Stock ATSs to 
publicly disclose their fees, charges, and rebates on proposed Form 
ATS-N? Why or why not?
    444. Do you believe the Commission should require NMS Stock ATSs to 
disclose their complete fee schedules? Are there other ways that NMS 
Stock ATSs earn revenue about which the Commission should require 
disclosure?
    445. Do you believe there is other information that market 
participants might find relevant or useful regarding fees, rebates and 
other charges? If so, describe such information and explain whether, 
and if so why, such information should be required to be provided under 
proposed Form ATS-N. Please support your arguments.
    446. Do you believe there is any information that would be required 
by Part IV, Item 12 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    447. Do you believe that the information required by Part IV, Item 
12 of proposed Form ATS-N would assist market participants and the 
Commission in comparing fees across NMS Stock ATSs? Why or why not? 
Please support your arguments.
    448. Do you believe that the information required by Part IV, Item 
12 of proposed Form ATS-N would allow the Commission to gather further 
information and analyze trends in the market, including how the 
prevalence of different fee structures may impact different categories 
of market participants? Would this information assist the Commission in 
evaluating the potential incentives and disincentives created by 
different fee structures in the market for NMS stocks? Why or why not? 
Please support your arguments.
    449. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 12 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 12 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    450. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
12 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If

[[Page 81081]]

so, how else could this information be obtained and would such 
alternative means be preferable to the proposed disclosures in Part IV, 
Item 12?

M. Trade Reporting, Clearance and Settlement

    Part IV, Item 13 would require an NMS Stock ATS to describe its 
arrangements or procedures for trade reporting, clearance, and 
settlement of transactions. Part IV, Item 13(a) of proposed Form ATS-N 
would require an NMS Stock ATS to describe any arrangements or 
procedures for reporting transactions on the NMS Stock ATS and if the 
trade reporting procedures are not the same for all subscribers and 
persons, the NMS Stock ATS would be required to describe any 
differences. Part IV, Item 13(b) of proposed Form ATS-N would require 
an NMS Stock ATS to describe any arrangements or procedures undertaken 
by the NMS Stock ATS to facilitate the clearance and settlement of 
transactions on the NMS Stock ATS. If the clearance and settlement 
procedures are not the same for all subscribers and persons, the NMS 
Stock ATS would be required to describe any differences. The Commission 
notes that Item 13 of proposed Form ATS-N would solicit similar 
information that is solicited pursuant to Exhibit F, subsection (d) of 
Form ATS, which currently requires ATSs to provide their procedures 
governing execution, reporting, clearance, and settlement of 
transactions effected through the ATS.\497\
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    \497\ In contrast to current Form ATS, Form ATS-N further would 
require that an NMS Stock ATS describe any differences in the manner 
in which its trade reporting, clearance, and settlement procedures 
are applied among subscribers and other persons. Also, Exhibit F, 
subsection (d) of Form ATS requires ATSs to provide the procedures 
governing execution in the same section as reporting and clearance 
and settlement procedures, whereas Form ATS-N would require 
information on execution procedures under a separate item, Part IV, 
Item 7.
---------------------------------------------------------------------------

    Trade reporting furthers the transparent, efficient, and fair 
operation of the securities markets.\498\ For example, among other 
requirements, a broker-dealer operator of an NMS Stock ATS that is a 
member of FINRA has trade reporting obligations to FINRA under FINRA 
Rule 4552 and FINRA Rule 6730. The Commission preliminarily believes 
the proposed disclosure of the trade reporting procedures of an NMS 
Stock ATS under Part IV, Item 13(a) of proposed Form ATS-N would also 
allow the Commission and the NMS Stock ATS's SRO to more easily review 
the compliance of the NMS Stock ATS with its applicable trade reporting 
obligations. The Commission also preliminarily believes market 
participants may also find the disclosure of these procedures useful to 
understanding how their trade information is reported.
---------------------------------------------------------------------------

    \498\ See Regulation ATS Adopting Release, supra note 7, at 
70887 (stating the market-wide transaction and quotation reporting 
plans operated by the registered national securities exchanges are 
responsible for the transparent, efficient, and fair operations of 
the securities markets).
---------------------------------------------------------------------------

    Part IV, Item 13(b) of proposed Form ATS-N would require that an 
NMS Stock ATS describe any arrangements or procedures undertaken by the 
NMS Stock ATS to facilitate the clearance and settlement of 
transactions on the NMS Stock ATS. The Commission has previously stated 
that the integrity of the trading markets depends on the prompt and 
accurate clearance and settlement of securities transactions.\499\ For 
example, the description of procedures required by Item 13(b) of 
proposed Form ATS-N could include the process through which an NMS 
Stock ATS clears a trade (e.g., whether the NMS Stock ATS becomes a 
counterparty to a transaction, interposing itself between two 
counterparties to a transaction, or whether the NMS Stock ATS submits 
trades to a registered clearing agency for clearing) and any 
requirements an NMS Stock ATS places on its subscribers, or other 
persons whose orders are routed to an NMS Stock ATS, to have clearance 
and settlement systems and/or arrangements with a clearing firm. The 
Commission preliminarily believes market participants would likely find 
the disclosures required by Item 13(b) to be useful in understanding 
the measures undertaken by an NMS Stock ATS to facilitate clearance and 
settlement of subscriber orders on the NMS Stock ATS and allow them to 
more easily compare the clearance arrangements required across NMS 
Stock ATSs as part of deciding where to route their trading interest. 
The Commission preliminarily believes that the disclosures required by 
Part IV, Item 13 of proposed Form ATS-N may assist the Commission in 
better understanding the trade reporting, clearance and settlement 
procedures of NMS Stock ATSs and trends in the market as part of the 
Commission's overall review of market structure.
---------------------------------------------------------------------------

    \499\ See id. at 70897.
---------------------------------------------------------------------------

Request for Comment
    451. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 13 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    452. Do you believe Part IV, Item 13 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding its arrangements or 
procedures for trade reporting, clearance, and settlement of 
transactions? Please explain.
    453. Do you believe there is other information that market 
participants might find relevant or useful regarding procedures for 
trade reporting, clearance, and settlement of transactions on the NMS 
Stock ATSs? If so, describe such information and explain whether, and 
if so why, such information should be required to be provided under 
proposed Form ATS-N. Please support your arguments.
    454. Is it sufficiently clear what information would be required by 
Part IV, Item 13 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific
    455. Do you believe there is any information that would be required 
by Part IV, Item 13 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    456. Do you believe that the information required by Part IV, Item 
13 of proposed Form ATS-N will assist market participants in the manner 
described above? Why or why not? Please support your arguments.
    457. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 13 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 13 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    458. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
13 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 13?

N. Order Display and Execution Access

    Part IV, Item 14 of proposed Form ATS-N would require an NMS Stock 
ATS to provide the following information if the NMS Stock ATS displays 
orders in an NMS stock to any person other than employees of the NMS 
Stock ATS and executed 5% or more of the average daily trading

[[Page 81082]]

volume in that NMS stock as reported by an effective transaction 
reporting plan for four of the preceding six calendar months: (a) The 
ticker symbol for each such NMS stock displayed for each of the last 6 
calendar months; (b) the manner in which the NMS Stock ATS displays 
such orders on a national securities exchange or through a national 
securities association; and (c) how the NMS Stock ATS provides access 
to such orders displayed in the national market system equivalent to 
the access to other orders displayed on that exchange or 
association.\500\
---------------------------------------------------------------------------

    \500\ In response to Part IV, Item 14 of proposed Form ATS-N, an 
NMS Stock ATS filing a Form ATS-N would indicate ``not applicable'' 
if the NMS Stock ATS had not triggered the volume thresholds under 
Rule 301(b)(3)(i) of Regulation ATS before commencing operations 
pursuant to an effective Form ATS-N. If an NMS Stock ATS triggers 
the Rule 301(b)(3)(i) thresholds after commencing operations 
pursuant to an effective Form ATS-N, the Commission generally would 
consider this to be a material change to the operations of the NMS 
Stock ATS (assuming it is not already complying with the display and 
access requirements of Rule 301(b)(3)), and the NMS Stock ATS would 
be required to file a Form ATS-N Amendment pursuant to proposed Rule 
304(a)(2)(i)(A). In the case where an NMS Stock ATS has voluntarily 
chosen to comply with the display and access requirements of Rule 
301(b)(3)(ii) and (iii) before crossing the relevant thresholds, the 
NMS Stock ATS would nevertheless have to file a Form ATS-N Amendment 
upon surpassing the thresholds within 30 days after the end of the 
calendar quarter pursuant to proposed Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

    The information elicited in Part IV, Item 14 relates to an NMS 
Stock ATS's obligations under current Rule 301(b)(3) of Regulation ATS, 
which applies if an ATS displays a subscriber order in an NMS stock to 
any person other than ATS employees, and during at least 4 of the 
preceding 6 calendar months, executed 5% or more of the average daily 
trading volume in that NMS Stock as reported by an effective 
transaction reporting plan. Rule 301(b)(3)(ii) and (iii) requires 
qualifying ATSs to report their highest bid and lowest offer for the 
relevant NMS stock for inclusion in the quotation data made available 
by the national securities exchange or national securities association 
to which it reports and provide equivalent access to effect a 
transaction with other orders displayed on the exchange or by the 
association.\501\ Under the current regulatory regime for ATSs, there 
is no mechanism under which an ATS must notify the Commission, its SRO, 
or market participants after it has triggered those requirements.\502\
---------------------------------------------------------------------------

    \501\ See 17 CFR 242.301(b)(3)(ii) and (iii).
    \502\ In contrast, an ATS that triggers the ``fair access'' 
requirements under Rule 301(b)(5), see supra notes 92-95 and 426-429 
and accompanying text, is required to attach Exhibit C to Form ATS-
R, which is filed with the Commission, but not publicly available. 
Exhibit C of Form ATS-R requires an ATS that triggered the fair 
access requirements to: (1) Provide a list of all persons granted, 
denied, or limited access to the ATS during the period covered by 
the ATS-R and (2) designate for each person (a) whether they were 
granted, denied, or limited access, (b) the date the ATS took such 
action, (c) the effective date of such action, and (d) the nature of 
any denial on limitation of access. See supra note 453.
---------------------------------------------------------------------------

    The information required by Part IV, Item 14 of proposed Form ATS-N 
is designed to elicit information about how the NMS Stock ATS complies 
with the requirements of Rule 301(b)(3) of Regulation ATS when 
applicable. The Commission preliminarily believes that the disclosure 
of the information required by Item 14 of proposed Form ATS-N would 
facilitate the Commission's oversight of NMS Stock ATSs and their 
compliance with Rule 301(b)(3) and help the Commission discover a 
potential violation of the federal securities laws and rules or 
regulations thereunder in a more expeditious manner than if the 
disclosures were not required. In part, because the thresholds required 
for display and access are counted for each NMS stock individually, an 
NMS Stock ATS would be required to disclose the ticker symbol for the 
relevant NMS stock to aid the Commission in evaluating its compliance. 
The Commission also preliminarily believes that these disclosures would 
help ensure that market participants and the Commission are aware when 
an NMS Stock ATS has become a significant source of liquidity in an NMS 
stock. Further, the Commission preliminarily believes that market 
participants would find the information disclosed in this item useful 
to understand how they can access applicable quotations.
Request for Comment
    459. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 14 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    460. Do you believe Part IV, Item 14 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding the NMS Stock ATS's 
obligations under current Rule 301(b)(3) of Regulation ATS? Please 
explain.
    461. Do you believe there is other information that market 
participants might find relevant or useful regarding the NMS Stock 
ATS's obligations under current Rule 301(b)(3) of Regulation ATS? If 
so, describe such information and explain whether, and if so why, such 
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
    462. Is it sufficiently clear what information would be required by 
Part IV, Item 14 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    463. Do you believe there is any information that would be required 
by Part IV, Item 14 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    464. Do you believe that the information required by Part IV, Item 
14 of proposed Form ATS-N will assist market participants in accessing 
applicable quotations and ensuring they receive equivalent access on 
the NMS Stock ATS? Why or why not? Please support your arguments.
    465. Do you believe that the imposition of the requirements of Rule 
301(b)(3) on an NMS Stock ATS crossing the relevant volume thresholds 
of Rule 301(b)(3)(i) and meeting the display requirement of the rule, 
should constitute a material change in the operations of the NMS Stock 
ATS such that it should be reported to the Commission in advance? Why 
or why not?
    466. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 14 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 14 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    467. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
14 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 14?

[[Page 81083]]

    In 2009, the Commission published a proposal to address certain 
practices with respect to undisplayed liquidity, which is trading 
interest that is available for execution at a trading center, but is 
not included in the consolidated quotation data that is widely 
disseminated to the public.\503\ Among other things, the Commission 
proposed amending Rule 301(b)(3) of Regulation ATS to lower the trading 
volume threshold that triggers public display obligations for ATSs from 
5% or more of the aggregate average daily share volume for an NMS stock 
as reported by an effective transaction reporting plan to 0.25% or more 
of the aggregate average daily share volume for an NMS stock as 
reported by an effective transaction reporting plan.\504\ The 
Commission also proposed to change the definition of ``bid'' or 
``offer'' in Regulation NMS to clarify that the public quoting 
requirements apply to actionable indications of interest privately 
transmitted by dark pools to selected market participants.\505\
---------------------------------------------------------------------------

    \503\ See generally Regulation of Non-Public Trading Interest, 
supra note 123.
    \504\ See id. at 61216.
    \505\ See id.
---------------------------------------------------------------------------

Request for Comment
    468. Do you believe that the Commission should lower the 5% trading 
volume threshold in Rule 301(b)(3) of Regulation ATS that triggers the 
public display requirement for ATSs? Why or why not? If so, what is the 
appropriate threshold level? Please support your arguments.
    469. Do you believe that the Commission should define actionable 
indications of interest in the definition of ``bid'' and ``offer'' in 
Regulation NMS? Why or why not? Please support your arguments.

O. Fair Access

    Part IV, Item 15 of proposed Form ATS-N would require an NMS Stock 
ATS to provide the following information if the NMS Stock ATS executes 
5% or more of the average daily trading volume in an NMS stock as 
reported by an effective transaction reporting plan for four of the 
preceding six calendar months: (a) The ticker symbol for each NMS stock 
for each of the last 6 calendar months; and (b) a description of the 
written standards for granting access to trading on the NMS Stock 
ATS.\506\ As explained above,\507\ Rule 301(b)(5)(ii)(A) of Regulation 
ATS requires an ATS to establish written standards for granting access 
to trading on its system when it crosses the fair access thresholds of 
Rule 301(b)(5)(i) and does not meet the exception set forth in Rule 
301(b)(5)(iii). If an ATS crosses the fair access thresholds, Rule 
301(b)(5)(ii)(B) requires the ATS to ``not unreasonably prohibit or 
limit any person in respect to access to services offered by such 
alternative trading system by applying the [written] standards . . . in 
an unfair or discriminatory manner.'' \508\
---------------------------------------------------------------------------

    \506\ In response to Part IV, Item 15 of proposed Form ATS-N, an 
NMS Stock ATS filing a Form ATS-N would indicate ``not applicable'' 
if the NMS Stock ATS had not triggered the volume thresholds under 
Rule 301(b)(5)(i) of Regulation ATS before commencing operations 
pursuant to an effective Form ATS-N. If an NMS Stock ATS triggers 
the Rule 301(b)(5)(i) thresholds after commencing operations 
pursuant to an effective Form ATS-N, the Commission would generally 
consider this to be a material change to the operations of the NMS 
Stock ATS (assuming it is not already complying with the fair access 
requirements of Rule 301(b)(5)), and the NMS Stock ATS would be 
required to file a Form ATS-N Amendment pursuant to proposed Rule 
304(a)(2)(i)(A). In the case where an NMS Stock ATS has voluntarily 
chosen to comply with the fair access requirements of Rule 
301(b)(5)(ii) before crossing the relevant thresholds, the NMS Stock 
ATS would nevertheless have to file a Form ATS-N Amendment upon 
surpassing the thresholds within 30 days after the end of the 
calendar quarter pursuant to Rule proposed 304(a)(2)(i)(B).
    \507\ See supra notes 92-95 and accompanying text.
    \508\ See 17 CFR 242.301(b)(5)(ii)(B).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the disclosure of the 
information requested by Part IV, Item 15 of proposed Form ATS-N would 
facilitate the Commission's oversight of NMS Stock ATSs and their 
compliance with Rule 301(b)(5). Because the volume thresholds required 
for fair access are counted for each NMS stock individually, an NMS 
Stock ATS would be required to disclose the ticker symbol for the 
relevant NMS stock to aid the Commission in evaluating the NMS Stock 
ATS's compliance. The Commission also preliminarily believes that it is 
important for market participants to be aware of whether an NMS Stock 
ATS is a significant source of liquidity for an NMS stocks and 
therefore, must provide fair access. Although Exhibit C of Form ATS-R 
requires an ATS to notify the Commission when it has crossed a fair 
access threshold in a particular calendar quarter,\509\ there is 
currently no requirement that an ATS must notify the public when it has 
done so. The Commission preliminarily believes that having such 
information publicly available will help market participants better 
evaluate trading opportunities and where to route orders in order to 
reach their trading and/or investment objectives. The Commission 
preliminarily believes that the disclosures that would be required by 
Item 15 would help the Commission discover a potential violation of the 
federal securities laws and rules or regulations thereunder in a more 
expeditious manner than if the disclosures were not required.
---------------------------------------------------------------------------

    \509\ See supra note 453.
---------------------------------------------------------------------------

Request for Comment
    470. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 15 of Form ATS-N? Why or why not? If 
so, what level of detail should be disclosed? Please be specific.
    471. Do you believe Part IV, Item 15 of proposed Form ATS-N 
captures the information that is most relevant to understanding the 
operations of the NMS Stock ATS regarding the written standards for 
granting access to trading on its system when it crosses the fair 
access thresholds of Rule 301(b)(5)(i) (and does not meet the exception 
set forth in Rule 301(b)(5)(iii))? Please explain.
    472. Do you believe there is other information that market 
participants might find relevant or useful regarding the written 
standards for granting access to trading on its system when it crosses 
the fair access thresholds of Rule 301(b)(5)(i) (and does not meet the 
exception set forth in Rule 301(b)(5)(iii))? If so, describe such 
information and explain whether, and if so why, such information should 
be required to be provided under proposed Form ATS-N. Please support 
your arguments.
    473. Do you believe there is any information that would be required 
by Part IV, Item 15 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    474. Is it sufficiently clear what information would be required by 
Part IV, Item 15 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    475. Do you believe that the disclosures under Part IV, Item 15 of 
proposed Form ATS-N would help market participants better evaluate 
trading opportunities and where to route orders in order to reach their 
investment objectives? Why or why not? Please support your arguments.
    476. Do you believe that the imposition of the requirements of Rule

[[Page 81084]]

301(b)(5) on an NMS Stock ATS crossing the relevant volume thresholds 
of Rule 301(b)(5)(i) should constitute a material change in the 
operations of the NMS Stock ATS such that it should be reported to the 
Commission in advance? Why or why not?
    477. What are the potential costs and benefits of disclosing the 
information required by Part IV, Item 15 of proposed Form ATS-N? Would 
the proposed disclosures in Part IV, Item 15 of proposed Form ATS-N 
require an NMS Stock ATS to reveal too much (or not enough) information 
about its structure and operations? Why or why not? Please support your 
arguments.
    478. Do you believe there are other ways to obtain the same 
information as would be required from NMS Stock ATSs by Part IV, Item 
15 of proposed Form ATS-N other than through disclosure on proposed 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the proposed disclosures 
in Part IV, Item 15?

P. Market Quality Statistics Published or Provided by the NMS Stock ATS 
to Subscribers

    Part IV, Item 16 of proposed Form ATS-N would require an NMS Stock 
ATS to explain and provide certain aggregate platform-wide market 
quality statistics that it publishes or provides to one or more 
subscribers regarding the NMS Stock ATS.\510\ Under Item 16, if the NMS 
Stock ATS publishes or otherwise provides to one or more subscribers 
aggregate platform-wide order flow and execution statistics of the NMS 
Stock ATS that are not otherwise required disclosures under Exchange 
Act Rule 605 of Regulation NMS, it would be required to: (i) List and 
describe the categories of the aggregate platform-wide order flow and 
execution statistics published or provided; (ii) describe the metrics 
and methodology used to calculate the aggregate platform-wide order 
flow and execution statistics; and (iii) attach as Exhibit 5 the most 
recent disclosure of the aggregate platform-wide order flow and 
execution statistics published or provided to one or more subscribers 
for each category or metric as of the end of the calendar quarter. An 
NMS Stock ATS would not be required to develop or publish any new 
statistics for purposes of making this disclosure; it would only be 
required to make the disclosures for statistics it already otherwise 
collects and publishes or provides to one or more subscribers to the 
NMS Stock ATS.
---------------------------------------------------------------------------

    \510\ An NMS Stock ATS would only be required to provide order 
flow and execution statistics that are aggregated across the ATS as 
a whole, not subscriber-specific order flow and execution 
statistics.
---------------------------------------------------------------------------

    The Commission preliminarily believes that some NMS Stock ATSs 
voluntarily publish or otherwise provide to subscribers aggregate 
platform-wide order flow and execution statistics that do not fall 
under the statistical information that is required to be disclosed 
under Exchange Act Rule 605,\511\ which requires market centers, such 
as NMS Stock ATSs, to publish monthly reports of statistics on their 
order executions. To the extent an NMS Stock ATS publishes or provides 
such aggregate platform-wide statistics to one or more subscribers, 
Part IV, Items 16(a) and (b) of proposed Form ATS-N would require the 
NMS Stock ATS to list and describe the categories or metrics of the 
statistics it publishes or provides to subscribers and describe any 
criteria or methodology that the ATS uses to calculate those 
statistics, respectively. Item 16(c) would require the NMS Stock ATS to 
attach as Exhibit 5 the most recent disclosure of order flow and 
execution statistics published or provided for each category or metric 
as of the end of the calendar quarter.\512\ To comply with the 
requirements of Item 16(c), an NMS Stock ATS would file a Form ATS-N 
Amendment with an updated Exhibit 5 within 30 calendar days after the 
end of each calendar quarter.\513\
---------------------------------------------------------------------------

    \511\ 17 CFR 242.605.
    \512\ For instance, if an NMS Stock ATS publishes or provides a 
particular statistic on a daily basis, the NMS Stock ATS would 
include in Exhibit 5 the statistic that was published or provided to 
one or more subscribers on the last trading day of the calendar 
quarter (e.g., the statistic published or provided on June 30th or 
last trading day prior to June 30th). If an NMS Stock ATS publishes 
or provides a particular statistic weekly, the NMS Stock ATS would 
be required to include in Exhibit 5 the statistic that was published 
or provided to one or more subscribers at the end of the week prior 
to the end of the calendar quarter (e.g., the statistic published 
for the last full week of June).
    \513\ See proposed Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

    Under Part IV, Item 16, an NMS Stock ATS would be required to 
explain and provide any aggregate platform-wide order flow or execution 
statistic that is not otherwise a required disclosure under Exchange 
Act Rule 605 and published or provided to one or more subscribers by 
the NMS Stock ATS. An example of a type of statistic that would be a 
required disclosure under Item 16 would be statistics related to the 
percentage of midpoint executions on the NMS Stock ATS that the NMS 
Stock ATS publishes or otherwise provides to subscribers. The NMS Stock 
ATS would be required to list that category under Part IV, Item 16(a) 
and explain how the NMS Stock ATS calculates that statistic under Item 
16(b). Within 30 calendar days after the end of each calendar quarter, 
the NMS Stock ATS would be required to attach an Exhibit 5 containing 
the most recent percentage it disseminated during the previous quarter. 
The Commission preliminarily believes that requiring the NMS Stock ATS 
to provide the statistic on Form ATS-N on a quarterly basis would allow 
market participants to obtain insight into the nature of trading on the 
NMS Stock ATS on a sufficiently frequent basis while minimizing the 
reporting burden for the NMS Stock ATS.
    The Commission preliminarily believes that an NMS Stock ATS may 
choose to create and publish or provide to one or more subscribers 
information concerning order flow and execution quality for different 
reasons. For example, the NMS Stock ATS may have concluded that 
publication of certain statistics may highlight certain characteristics 
of the NMS Stock ATS that would attract certain order flow. Or a 
subscriber may have requested that the NMS Stock ATS provide certain 
aggregated information concerning order flow and execution quality that 
the subscriber needed to assess the ATS's operations. The Commission 
notes that certain performance metrics and statistics may be important 
factors for investors and subscribers in comparing and selecting an ATS 
that is most appropriate for their investment objectives.\514\ Indeed, 
Exchange Act Rule 605 currently requires ATSs to provide quarterly 
public reports containing certain information concerning ATS 
executions. As such, to the extent that an NMS Stock ATS has made a 
determination to create and publish or provide to subscribers certain 
aggregate platform-wide order flow and execution quality statistics, 
the Commission preliminarily believes that others may also find such 
information useful when evaluating an NMS Stock ATS as a possible venue 
to which to route orders in order to accomplish their investing or 
trading objectives.
---------------------------------------------------------------------------

    \514\ See generally Tuttle: ATS Trading in NMS Stocks, supra 
note 126.
---------------------------------------------------------------------------

    The Commission also solicits comment on whether other standardized 
statistical disclosures should be required from NMS Stock ATSs and the 
nature and extent of any such metrics or statistics that commenters 
believe should be disclosed.
Request for Comment
    479. Do you believe the Commission should require the disclosure of 
the information on Part IV, Item 16 of Form ATS-N? Why or why not? If 
so, what

[[Page 81085]]

level of detail should be disclosed? Please be specific.
    480. Do you believe that the statistics required on Part IV, Item 
16 of Form ATS-N should be provided on a more or less frequent basis? 
Why or why not? If so, how often should the statistics be provided 
(e.g., on a daily, weekly, monthly, quarterly, or annual basis)? Please 
support your arguments.
    481. Is it sufficiently clear what information would be required by 
Part IV, Item 16 of proposed Form ATS-N? Should the item be refined in 
any way? If so, how? Please be specific.
    482. Do you believe that the disclosures under Part IV, Item 16 of 
proposed Form ATS-N would help market participants better evaluate 
trading opportunities and where to route orders in order to reach their 
investment objectives? Why or why not? Please support your arguments.
    483. Do you believe that the Commission should require standardized 
public disclosures of performance metrics or statistics for each NMS 
Stock ATS? Why or why not? Please support your arguments. If so, what 
metrics or statistics should NMS Stock ATSs be required to disclose 
publicly? Please be specific.
    484. What percentage of NMS Stock ATSs publish or provide market 
quality statistics not otherwise required under Exchange Act Rule 605? 
Please explain how you have calculated this number.
    485. Do you believe that there are other statistics or data that an 
NMS Stock ATS should be required to provide on proposed Form ATS-N that 
would be useful to market participants that either subscribe to or are 
considering subscribing to the NMS Stock ATS? If so, please identify 
those metrics and explain how they would be useful to market 
participants. Please support your arguments.
    486. Should the Commission require NMS Stock ATSs to disclose on 
Form ATS-N, statistics regarding the extent of trading by the broker-
dealer operator and its affiliates on the NMS Stock ATS? Why or why 
not? If so, what statistics should be required to be disclosed? Please 
support your arguments. If you believe that an NMS Stock ATS should 
disclose statistics about the extent of its broker-dealer operator's 
and its affiliates' trading activity on the NMS Stock ATS, how often 
should these statistics be disclosed (e.g., on a weekly, monthly, 
quarterly, annual basis)?
    487. Do you believe there is any information that would be required 
by Part IV, Item 16 of proposed Form ATS-N that an NMS Stock ATS should 
not be required to disclose due to concerns regarding confidentiality, 
business reasons, trade secrets, burden, or any other concerns? Why or 
why not? Please support your arguments.
    The Commission also notes that some industry participants have 
previously requested public statistics about the quality of these 
markets. In the 2010 Equity Market Structure Release, the Commission 
solicited public comment about, among other things, market structure 
performance and order execution quality, and how transparency could be 
improved in these areas.\515\ For example, the Commission noted that an 
important objective of many dark pools is to offer institutional 
investors an efficient venue in which to trade in large size with 
minimized market impact,\516\ and requested comment on the extent to 
which dark pools meet this objective of improving execution quality for 
the large orders of institutional investors.\517\ In seeking comment on 
other tools to protect investor interests, the Commission also 
requested comment on Exchange Act Rules 605 and Exchange Act Rule 
606.\518\ Exchange Act Rule 606 requires broker-dealers to publish 
quarterly reports on their routing practices, including the venues to 
which they route orders for execution.\519\ Specifically, the 
Commission asked about the currency of Exchange Act Rules 605 and 606 
and whether the information provided on the reports was useful to 
investors and their brokers in assessing the quality of order execution 
and routing practices.\520\
---------------------------------------------------------------------------

    \515\ See Equity Market Structure Release, supra note 124 at 
3602-3614. See also supra Section III.D (discussing certain comments 
received on the Equity Market Structure Release).
    \516\ See Equity Market Structure Release, supra note 124 at 
3612.
    \517\ See id.
    \518\ 17 CFR 242.606.
    \519\ See 2010 Equity Market Structure Release, supra note 124, 
at 3605-3606.
    \520\ See id.
---------------------------------------------------------------------------

    In response, some commenters stated their concern about the lack of 
market quality information available to the public about ATSs and other 
trading centers. For example, one commenter expressed support for 
national securities exchanges and ATSs to disclose how often a 
functionality is used and more market quality statistics, such as 
quote-per-execution ratios, duration of quotes and number of times 
orders are routed out without getting filled so that investors and 
other market participants could better gauge execution quality.\521\ 
Another commenter stated that ``regulators should direct broker-dealers 
to provide public reports of order routing and execution quality 
metrics that are geared toward retail investors.'' \522\ This commenter 
also stated that ``the Commission should direct broker-dealers to 
provide institutional clients with standardized execution venue 
statistical analysis reports'' and noted its commitment ``to working 
with other industry groups to develop consistent industry templates, 
which it believes will greatly enhance institutional investors' ability 
to evaluate their brokers' routing practices and the quality of 
execution provided by different venues.'' \523\ Another commenter 
stated its belief that publicly available order routing and execution 
quality statistics pursuant to Rules 605 and 606 do not provide 
information to measure broker-dealers' and execution venues' 
performance with respect to specific institutional investors and that 
the reports are not presented in a uniform manner that allows for easy 
comparison across different broker-dealers and venues.\524\
---------------------------------------------------------------------------

    \521\ Goldman Sachs letter, supra note 175, at 10.
    \522\ See SIFMA letter #2, supra note 175 at 12. For example, 
the commenter suggested including information on ``(i) percent of 
shares Improved, (ii) average price improvement, (iii) net Price 
Improvement per share, and (iv) effective/quoted spread ratio.''
    \523\ See SIFMA letter #2, supra note 175 at 13. The commenter 
gave examples of the types of information (per venue) that should be 
incorporated into these reports as: (i) Percentage of orders 
executed, (ii) average number of shares ordered and executed, (iii) 
fill rates--overall, taken, added, and routed, and (iv) percentage 
executed displayed and undisplayed.
    \524\ See letter from Dorothy M. Donohue, Deputy General 
Counsel, Investment Company Institute; Stuart J. Kaswell, Executive 
Vice President & Managing Director, General Counsel, Managed Funds 
Association; and Randy Snook, Executive Vice President, Securities 
Industry and Financial Markets Association, dated October 23, 2014, 
at 2.
    This commenter also provided a template for disclosure of order 
routing and execution quality information that institutional 
investors could request from their broker-dealers, which included, 
among other things: The number of total shares routed as actionable 
IOIs; the percent of shares routed to the venue by the broker that 
resulted in executions at that venue); the average length of time 
(measured in milliseconds) that orders (other than IOCs) were posted 
to a venue before being filled or cancelled; the average size, by 
number of shares, of each order actually executed on the venue; the 
aggregate number of shares executed at the venue that were priced at 
or near the mid-point between the bid and the offer; and the 
percentage of total shares executed that were executed at or near 
the midpoint between the bid and the offer. See id. at ``Broker 
Routing Venue Analysis Template Definitions.''
---------------------------------------------------------------------------

    With regard to the comment that the execution quality statistics 
currently made public under Rules 605 and 606 are inadequate, the 
Commission notes that it is considering proposing to amend Rules 600 
and 606 to standardize and improve transparency around how broker-
dealers handle and route institutional customer orders. These

[[Page 81086]]

revisions being considered would include addressing commenter concerns 
regarding disclosures by broker-dealers about the trading venues to 
which they route orders, particularly with respect to order and 
execution sizes, fill rates, price improvement, and the use of 
actionable indications of interests.\525\ The Commission also is 
considering disclosures to facilitate the ability of institutional 
investors to assess potential conflicts of interest and risks of 
information leakage.
---------------------------------------------------------------------------

    \525\ See id.
---------------------------------------------------------------------------

Request for Comment
    488. Do you believe that there is information that the Commission 
should require NMS Stock ATSs to disclose other than the information 
that is currently available to market participants from order execution 
reports pursuant to Exchange Act Rule 605? Why or why not? Please 
support your arguments. If so, what information should be disclosed and 
how would the information be useful to market participants? Please 
explain. Do you believe that there is information that the Commission 
should require a broker-dealer operator of the NMS Stock ATS to 
disclose other than the information that is currently available to 
market participants from order routing reports pursuant to Exchange Act 
Rules 606? Why or why not? Please support your arguments.
    489. Do you believe that there are other means by which market 
quality metrics should be required to be made available by NMS Stock 
ATSs to market participants, other than as disclosures on proposed Form 
ATS-N? Why or why not? Please support your arguments. If so, please 
identify by what means and why? Please support your arguments.
    490. Do you believe that an NMS Stock ATS should be required to 
disclose information about orders entered into its system and the 
ultimate disposition of such orders? Why or why not? Please support 
your arguments. For example, should NMS Stock ATSs disclose information 
regarding the average order size, average execution size, and 
percentage of orders marked immediate or cancel? Why or why not? Please 
support your arguments.
    491. Do you believe that NMS Stock ATSs should be required to 
disclose whether the NMS Stock ATS provided order flow and execution 
statistics to some subscribers and not others? Why or why not? Please 
support your arguments.
    492. Do you believe that NMS Stock ATSs should be required to 
disclose execution information such as the total number and percentage 
of shares executed at the midpoint, total number and percentage of 
shares executed at the national best bid, total number and percentage 
of shares executed at the national best offer, total number and 
percentage of shares executed between the national best bid and the 
midpoint, and total number and percentage of shares executed between 
the midpoint and the national best offer? Why or why not? Please 
support your arguments. If so, do you believe such information should 
be disclosed publicly on an aggregated basis or should the information 
be disclosed to each subscriber based on its own orders? Please support 
your arguments.
    493. Do you believe that the joint-industry plan should be amended 
for publicly disseminating consolidated trade data to require real-time 
disclosure of the identity of NMS Stock ATSs on reports of their 
executed trades? Why or why not? Please support your arguments. 
Alternatively, should executions on NMS Stock ATSs be publicly 
disseminated on a delayed basis? \526\ Why or why not? Please support 
your arguments. If so, how should this be done and what would be the 
appropriate delay? Please explain.
---------------------------------------------------------------------------

    \526\ FINRA Rule 4552 requires each ATS to report to FINRA 
weekly volume information and number of trades regarding equity 
securities transactions within the ATS. Each ATS is also required to 
use a single MPID when reporting information to FINRA and to report 
weekly aggregate volume information on a security-by-security basis 
to FINRA.
---------------------------------------------------------------------------

    494. Do you believe that there are other data elements that should 
be provided by NMS Stock ATSs in the consolidated trade data? What are 
they and why should they be required? Please be specific.

IX. Proposed Amendment to Rule 301(b)(10): Written Safeguards and 
Written Procedures To Protect Confidential Trading Information

    Current Rule 301(b)(10) of Regulation ATS \527\ requires every ATS 
to have in place safeguards and procedures to protect subscribers' 
confidential trading information and to separate ATS functions from 
other broker-dealer functions, including proprietary and customer 
trading.\528\ In the Regulation ATS Adopting Release, the Commission 
recognized that some broker-dealer operators provide traditional 
brokerage services as well as access to their ATS(s).\529\ The 
Commission further stated that Rule 301(b)(10) was not intended to 
preclude an ATS from providing its traditional brokerage services; 
rather, Rule 301(b)(10) was designed to prevent the misuse of private 
customer information in the system for the benefit of other customers, 
the ATS's operator, or its employees.\530\ The Commission also stated 
its belief that the sensitive nature of trading information subscribers 
send to ATSs requires such systems to take certain steps to ensure the 
confidentiality of such information.\531\ To illustrate its point, the 
Commission provided the example that unless subscribers consent, 
registered representatives of an ATS should not disclose information 
regarding trading activities of such subscribers to other subscribers 
that could not be ascertained from viewing the ATS's screens directly 
at the time the information is conveyed.\532\ As a result of its 
concerns regarding confidentiality, the Commission adopted Rule 
301(b)(10), which was designed to eliminate the potential for abuse of 
the confidential trading information that subscribers send to 
ATSs.\533\
---------------------------------------------------------------------------

    \527\ See 17 CFR 242.301(b)(10).
    \528\ See Regulation ATS Adopting Release, supra note 7, at 
70879.
    \529\ See id.
    \530\ See id.
    \531\ See id.
    \532\ The Commission stated that its concern regarding 
confidentiality grew out of its inspections of some ECNs, during 
which the Commission and its staff found that some of the broker-
dealers operating ECNs used the same personnel to operate the ECN as 
they did for more traditional broker-dealer activities, such as 
handling customer orders that were received by telephone. These 
types of situations create the potential for misuse of the 
confidential trading information in the ECN, such as customers' 
orders receiving preferential treatment, or customers receiving 
material confidential information about orders in the ECN. See id.
    \533\ See id.
---------------------------------------------------------------------------

    Rule 301(b)(10), however, does not currently require that the 
safeguards and procedures mandated under Rule 301(b)(10) be 
memorialized in writing. The Commission is now proposing to amend Rule 
301(b)(10) to require that such safeguards and procedures be reduced to 
writing.\534\ Specifically, the Commission proposes to amend Rule 
301(b)(10)(i) to require that all ATSs (including non-NMS Stock ATSs) 
establish written safeguards and written procedures to protect 
subscribers' confidential trading information.\535\ This would include 
an ATS adopting written safeguards and written procedures that limit 
access to the confidential trading information of subscribers to those 
employees of the ATS who are operating the system or are responsible 
for its compliance with

[[Page 81087]]

Regulation ATS or any other applicable rules,\536\ and implementing 
written standards controlling employees of the ATS trading for their 
own accounts.\537\ The Commission is also proposing to amend Rule 
301(b)(10)(ii) to require that the oversight procedures, which an ATS 
adopts and implements to ensure that the above safeguards and 
procedures are followed, be in writing.\538\
---------------------------------------------------------------------------

    \534\ As discussed above, proposed Form ATS-N would also require 
NMS Stock ATSs to describe the written safeguards and procedures. 
See Part III, Item 10 of Proposed Form ATS-N. See also supra Section 
VII.B.11.
    \535\ See proposed Rule 301(b)(10)(i).
    \536\ See proposed Rule 301(b)(10)(i)(A).
    \537\ See proposed Rule 301(b)(10)(i)(B).
    \538\ See proposed Rule 301(b)(10)(ii).
---------------------------------------------------------------------------

    The Commission continues to believe that safeguards and procedures 
to ensure the confidential treatment of ATS subscribers' trading 
information are important, and that the potential for misuse of such 
information continues to exist. The Commission preliminarily believes 
that requiring an ATS to reduce to writing those safeguards and 
procedures, as well as its oversight procedures to ensure that such 
safeguards and procedures are followed, would strengthen the 
effectiveness of the ATS's safeguards and procedures and would better 
enable the ATS to protect confidential subscriber trading information 
and implement and monitor the adequacy of, and the ATS's compliance 
with, its safeguards and procedures. For example, if an ATS were 
required to reduce its safeguards and procedures to writing, it could 
self-audit--or if it chose to do so, undergo a third-party audit--for 
compliance with those safeguards and procedures, and also assess their 
adequacy. In addition, the Commission preliminarily believes that 
reducing ATSs' safeguards and procedures under Rule 301(b)(10) to 
writing will help the Commission and its staff, and the staff of the 
SRO of which an ATS's broker-dealer operator is a member, evaluate 
whether an ATS has established such procedures and safeguards, whether 
the ATS has implemented and is abiding by them, and whether they comply 
with the requirements of Rule 301(b)(10). This should enable the 
Commission, and the applicable SRO(s), to exercise more effective 
oversight of ATSs regarding the ATSs' compliance with Rule 301(b)(10) 
and other federal securities laws, rules, and regulations. The 
Commission also preliminary believes that its proposal would benefit 
market participants because they would be able to better evaluate the 
implementation of such safeguards and procedures, due to the proposed 
rule to reduce those safeguards and procedures to writing.
Request for Comment
    495. Do you believe the Commission should require ATSs to reduce to 
writing their safeguards and procedures as described above? Why or why 
not? Should the requirement apply to all ATSs or only a subset such as 
NMS Stock ATSs? Please support your arguments.
    496. Do you believe that requiring ATSs to reduce to writing their 
safeguards and procedures, as proposed, would help to ensure that 
subscribers' confidential trading information is protected and not 
misused? If not, why not? Please support your arguments.
    497. Are there other conditions that the Commission should 
implement to achieve the goal of protecting subscribers' confidential 
trading information? If so, what are they and why would they be 
preferable? Please be specific.
    498. Currently, how common is it for ATSs to reduce to writing 
their safeguards and procedures to protect subscribers' confidential 
trading information and/or their oversight procedures to ensure that 
those safeguards and procedures are followed? For ATSs that have not 
reduced their safeguards and procedures to protect subscribers' 
confidential trading information to writing, how do they currently 
ensure their compliance with the requirements of Rule 301(b)(10)? 
Please be specific.
    499. For ATSs that have not reduced to writing their safeguards and 
procedures to protect subscribers' confidential trading information 
and/or their oversight procedures to ensure that those safeguards and 
procedures are followed, how long would it take to do so? Please 
explain.

X. Recordkeeping Requirements

    The Commission is proposing to amend Rules 303(a)(1) and 303(a)(2) 
of Regulation ATS to reflect its proposed amendments to Rule 301(b)(2) 
\539\ and 301(b)(10),\540\ and its proposed addition of Rule 304.\541\ 
In addition, the Commission is proposing to make a minor technical 
amendment to Rule 303.
---------------------------------------------------------------------------

    \539\ See supra Section IV.C.
    \540\ See supra Section IX.
    \541\ See supra Section IV.C.
---------------------------------------------------------------------------

    Currently, unless not required to comply with Regulation ATS 
pursuant to Rule 301(a) \542\ of Regulation ATS, ATS must comply with 
the recordkeeping requirements of Regulation ATS. Specifically, Rule 
301(b)(8) \543\ requires an ATS to make and keep current the records 
specified in Rule 302 \544\ and to preserve the records specified in 
Rule 303.\545\ In the Regulation ATS Adopting Release, the Commission 
stated that the requirements to make and preserve records set forth in 
Regulation ATS are necessary to create a meaningful audit trail and 
permit surveillance and examination to help ensure fair and orderly 
markets.\546\
---------------------------------------------------------------------------

    \542\ 17 CFR 242.301(a).
    \543\ See 17 CFR 242.301(b)(8).
    \544\ See 17 CFR 242.302.
    \545\ See 17 CFR 242.303.
    \546\ See Regulation ATS Adopting Release, supra note 7, at 
70877-78.
---------------------------------------------------------------------------

    Rule 303(a)(1) requires an ATS to preserve certain records for at 
least three years, the first two years in an easily accessible 
place.\547\ Specifically, Rule 303(a)(1) \548\ requires an ATS to 
preserve: All records required to be made pursuant to Rule 302; all 
notices provided to subscribers, including notices addressing hours of 
operation, system malfunctions, changes to system procedures, and 
instructions pertaining to access to the ATS; documents made or 
received in the course of complying with the system capacity, 
integrity, and security standards in Rule 301(b)(6), if applicable; 
\549\ and, if the ATS is subject to the fair access requirements under 
Rule 304(b)(5),\550\ a record of its access standards. Rule 303(a)(2) 
\551\ requires that certain other records must be kept for the life of 
the ATS and any successor enterprise, including partnership articles or 
articles of incorporation (as applicable), and copies of reports filed 
pursuant to Rule 301(b)(2),\552\ which includes current Form ATS, and 
records made pursuant to Rule 301(b)(5).\553\ In particular, reports 
required to be maintained for the life of the ATS or any successor 
enterprise include initial operation reports, amendments, and cessation 
of operations reports, filed on Form ATS.\554\
---------------------------------------------------------------------------

    \547\ See 17 CFR 242.303(a)(1).
    \548\ See 17 CFR 242.303(a)(1).
    \549\ See supra notes 96-100 and accompanying text.
    \550\ See supra notes 92-95 and accompanying text.
    \551\ See 17 CFR 242.303(a)(2).
    \552\ See 17 CFR 242.301(b)(2).
    \553\ See supra notes 92-95 and accompanying text.
    \554\ See 17 CFR 242.301(b)(2).
---------------------------------------------------------------------------

    The Commission is proposing to amend the record preservation 
requirements of Rule 303 to incorporate the preservation of records 
that would be created pursuant to the proposed requirements that NMS 
Stock ATSs file Forms ATS-N, Form ATS-N Amendments, and notices of 
cessation instead of Form ATS. Specifically, the Commission is 
proposing to amend Rule 303(a)(2)(ii) to require that an ATS shall 
preserve, for the life of the enterprise and of any successor 
enterprise, copies of reports filed pursuant to Rule 301(b)(2) or--in 
the case of an NMS

[[Page 81088]]

Stock ATS--Rule 304, and records made pursuant to Rule 301(b)(5).\555\ 
As a result, because an NMS Stock ATS would be required to file Forms 
ATS-N, Form ATS-N Amendments, and notices of cessation pursuant to 
proposed Rule 304, instead of on Form ATS, the NMS Stock ATS would be 
required to preserve those reports for the life of the enterprise and 
of any successor enterprise pursuant to the proposed amendments to Rule 
303(a)(2).\556\ The Commission is not proposing any amendments to the 
recordkeeping requirements of Rule 302, or any other amendments to the 
record preservation requirements of Rule 303(a)(2).
---------------------------------------------------------------------------

    \555\ See proposed Rule 301(a)(2)(ii).
    \556\ The Commission notes that an NMS Stock ATS that had 
previously made filings on Form ATS would be required to preserve 
those filings for the life of the enterprise, as well as filings 
made going forward on Form ATS-N.
---------------------------------------------------------------------------

    The Commission is also proposing amendments to the record 
preservation requirements of Rule 303(a)(1) to incorporate the 
Commission's proposed amendments to Rule 301(b)(10),\557\ which would 
require an ATS to reduce to writing its safeguards and procedures to 
ensure confidential treatment of subscribers' trading information and 
the oversight procedures to ensure that those safeguards and procedures 
are followed.\558\ Accordingly, the Commission is proposing to require 
an ATS, for a period of not less than three years, the first two years 
in an easily accessible place, to preserve at least one copy of the 
written safeguards and written procedures to protect subscribers' 
confidential trading information and the written oversight procedures 
created in the course of complying with Rule 301(b)(10).\559\ The 
Commission is not proposing to amend any other aspects of the records 
preservation requirements of Rule 303(a)(1). The Commission 
preliminarily believes that the proposed amendments to Rule 303 are 
necessary to create a meaningful audit trail of an ATS's current and 
previous written safeguards and procedures pursuant to Rule 301(b)(2) 
and permit surveillance and examination to help ensure fair and orderly 
markets,\560\ without imposing any undue burden on ATSs.
---------------------------------------------------------------------------

    \557\ See proposed Rule 301(b)(10).
    \558\ See supra Section VII (discussing the Commission's 
proposed amendments to Rule 301(b)(10)).
    \559\ See proposed Rule 303(a)(1)(v).
    \560\ See Regulation ATS Adopting Release, supra note 7, at 
70877-78.
---------------------------------------------------------------------------

    Finally, the Commission proposes to make a minor technical 
amendment to Rule 303(a). Currently, Rule 303(a) references ``paragraph 
(b)(9) of Sec.  242.301'' when setting forth the record preservation 
requirements for ATSs. The Commission is proposing to change the above 
reference to ``paragraph (b)(8) of Sec.  242.301'' because Rule 
301(b)(8) sets forth the recordkeeping requirements for ATSs.
Request for Comment
    500. Do you believe the Commission should amend the recordkeeping 
requirements for ATSs as proposed? Why or why not?
    501. Do you believe that there are any other requirements of Rule 
303 that should be amended to satisfy the objectives of this proposal? 
If so, what are they and why?
    502. Do you believe that the proposed amendments to the record 
preservation requirements of Rule 303 are reasonable? If not, why? 
Please support your arguments.

XI. General Request for Comment

    The Commission is requesting comments from all members of the 
public. The Commission particularly requests comment from the point of 
view of persons who operate ATSs that would meet the proposed 
definition of NMS Stock ATS, subscribers to those systems, investors, 
and registered national securities exchanges. The Commission seeks 
comment on all aspects of the proposed rule amendments and proposed 
form, particularly the specific questions posed above. Commenters 
should, when possible, provide the Commission with data to support 
their views. Commenters suggesting alternative approaches should 
provide comprehensive proposals, including any conditions or 
limitations that they believe should apply, the reasons for their 
suggested approaches, and their analysis regarding why their suggested 
approaches would satisfy the objectives of the proposed amendments. The 
Commission will carefully consider the comments it receives.
    503. Do you believe that there is other information about the 
nature or extent of the operations of an NMS Stock ATS that should be 
disclosed on proposed Form ATS-N? Are there specific topics about which 
the Commission should request more information? If so, what information 
should be disclosed and why?
    504. Do you believe that there are activities of an NMS Stock ATS 
broker-dealer operator and its affiliates that may give rise to 
potential conflicts of interest, other than those described, that 
should be disclosed on Form ATS-N? If so, what information should be 
disclosed and why? If so, what are they and why?
    505. Is there other information or data that would be useful for a 
market participant to consider when evaluating an NMS Stock ATS as a 
potential trading center for its orders? If so, what are they and why?

XII. Paperwork Reduction Act

    Certain provisions of the proposal contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\561\ The titles of these requirements 
are:
---------------------------------------------------------------------------

    \561\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

     Requirements for Alternative Trading Systems That Are Not 
National Securities Exchanges--Rule 301, Form ATS and Form ATS-R, 17 
CFR 242.301 (OMB Control No. 3235-0509);
     Rule 303 (17 CFR 242.303) Record Preservation Requirements 
for Alternative Trading Systems (OMB Control No. 3235-0505).
     Rule 304 and Form ATS-N (a proposed new collection of 
information).
    We are submitting these requirements to the Office of Management 
and Budget (``OMB'') for review and approval in accordance with the PRA 
and its implementing regulations.\562\ We are applying for an OMB 
control number for the proposed new collection of information in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If adopted, 
responses to the new collection of information would be mandatory. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid OMB control number.\563\
---------------------------------------------------------------------------

    \562\ 44 U.S.C. 3507; 5 CFR 1320.11.
    \563\ 5 CFR 1320.11(l).
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed amendments to Regulation ATS include two new 
categories of obligations that would require a collection of 
information within the meaning of the PRA. The first category relates 
to Rule 301(b)(10) of Regulation ATS \564\ and would apply to all ATSs, 
while the second category relates to proposed Form ATS-N and would 
apply only to NMS Stock ATSs.
---------------------------------------------------------------------------

    \564\ 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

1. Requirements Relating to Rule 301(b)(10) of Regulation ATS
    Under Rule 301(b)(10) of Regulation ATS, all ATSs are currently 
required to: (1) Establish adequate safeguards and procedures to 
protect subscribers'

[[Page 81089]]

confidential trading information; and (2) adopt and implement adequate 
oversight procedures to ensure that the safeguards and procedures 
established to protect subscribers' confidential trading information 
are followed. Rule 301(b)(10) of Regulation ATS further requires that 
the safeguards and procedures to protect subscribers' confidential 
trading information shall include: (1) 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 (2) implementing 
standards controlling employees of the ATS trading for their own 
accounts. The proposed amendments to Regulation ATS would require 
written safeguards and written procedures to protect subscribers' 
confidential trading information and written oversight procedures to 
ensure that the safeguards and procedures are followed.
    In addition, the Commission proposes to amend Rule 303(a)(1) \565\ 
of Regulation ATS to provide that all ATSs must preserve at least one 
copy of their written safeguards and written procedures to protect 
subscribers' confidential trading information and the written oversight 
procedures created in the course of complying with Rule 301(b)(10) of 
Regulation ATS. Under the proposed amendment, Rule 303(a)(1)(v) would 
be added to Regulation ATS to require an ATS to preserve such written 
safeguards and written procedures, and written oversight procedures for 
a period of not less than three years, the first two years in an easily 
accessible place.\566\
---------------------------------------------------------------------------

    \565\ 17 CFR 242.303(a)(1).
    \566\ Id.
---------------------------------------------------------------------------

2. Requirements Relating to Proposed Rules 301(b)(2)(viii) and 304 of 
Regulation ATS, Including Proposed Form ATS-N
    As described above, the Commission proposes that any ATS that meets 
the definition of an NMS Stock ATS would be required to complete Form 
ATS-N and file it with the Commission in a structured format.\567\ Upon 
the Commission declaring a Form ATS-N effective, the Commission would 
make the Form ATS-N publicly available. The Commission would also make 
publicly available upon filing all properly filed Form ATS-N Amendments 
and notices of cessation on Form ATS-N. The proposed amendments to 
Regulation ATS would also require each NMS Stock ATS to make public via 
posting on its Web site a direct URL hyperlink to the Commission's Web 
site that contains the documents enumerated in proposed Rule 304(b)(2).
---------------------------------------------------------------------------

    \567\ See generally supra Section IV.
---------------------------------------------------------------------------

    Proposed Form ATS-N consists of five parts. First, the entity 
submitting the filing would indicate whether it is submitting or 
withdrawing an initial filing. The entity would also indicate the type 
of filing--whether the filing is a Form ATS-N, a Form ATS-N Amendment 
(whether a material amendment, periodic amendment, or correcting 
amendment), or a notice of cessation, and if it is a notice of 
cessation, the date the NMS Stock ATS will cease to operate. If the 
filing is a Form ATS-N Amendment, the NMS Stock ATS would also be 
required to provide a brief narrative description of the amendment and 
a redline(s) showing changes to Part III and/or Part IV of proposed 
Form ATS-N. Part I would require that entity to state the name of the 
Registered Broker Dealer of the NMS Stock ATS (i.e., the broker-dealer 
operator), the name under which the NMS Stock ATS conducts business, if 
any, the MPID of the NMS Stock ATS, and whether it is an NMS Stock ATS 
currently operating pursuant to a previously filed initial operation 
report on Form ATS. Part II would require registration information 
regarding the broker-dealer operator of the ATS, such as the broker-
dealer's file number with the Commission, the name of the national 
securities association with which the broker-dealer operator is a 
member, the effective dates of the broker-dealer's registration with 
the Commission and membership in the national securities association, 
and the broker-dealer operator's CRD Number. In addition, Part II would 
require the address of the physical location of the NMS Stock ATS 
matching system, the NMS Stock ATS's mailing address, and a URL to the 
Web site of the NMS Stock ATS. Part II would also require information 
regarding the legal status of the broker-dealer operator of the NMS 
Stock ATS (e.g., corporation, partnership, sole proprietorship) and its 
date of formation. Furthermore, Part II of proposed Form ATS-N would 
require the NMS Stock ATS to attach the following three exhibits: (1) 
Exhibit 1--a copy of any materials currently provided to subscribers or 
other persons related to the operations of the NMS Stock ATS or the 
disclosures on Form ATS-N; (2) Exhibit 2A--a copy of the most recently 
filed or amended Schedule A of the broker-dealer operator's Form BD 
disclosing information relating to direct owners and executive 
officers; and (3) Exhibit 2B--a copy of the most recently filed or 
amended Schedule B of the broker-dealer operator's Form BD disclosing 
information related to indirect owners. In lieu of attaching Exhibits 
2A and 2B to proposed Form ATS-N, the NMS Stock ATSs would be able to 
provide a URL address for where the required documents can be found.
    Part III of proposed Form ATS-N would require an NMS Stock ATS to 
provide certain disclosures related to the activities of the broker-
dealer operator and its affiliates in connection with the NMS Stock 
ATS. Part III consists of ten items, which are summarized here, and 
explained in greater detail below in the discussion of the estimated 
burdens related to each disclosure requirement. Part III of proposed 
Form ATS-N would include disclosures relating to: (1) Whether the 
broker-dealer operator, or any of its affiliates, operate or control 
any non-ATS trading centers and how such non-ATS trading centers 
coordinate or interact with the NMS Stock ATS, if at all; (2) whether 
the broker-dealer operator, or any of its affiliates, operates another 
NMS Stock ATS and how such other NMS Stock ATS coordinates or interacts 
with the NMS Stock ATS completing the Form ATS-N, if at all; (3) the 
products and services offered by the broker-dealer operator, or any of 
its affiliates, to subscribers in connection with their use of the NMS 
Stock ATS; (4) whether the broker-dealer operator, or any of its 
affiliates, has any formal or informal arrangement with an unaffiliated 
person(s), or affiliate(s) of such person(s), that operates a trading 
center regarding access to the NMS Stock ATS, including preferential 
routing arrangements; (5) whether the broker-dealer operator or any of 
its affiliates enter orders or other trading interest on the NMS Stock 
ATS and the manner in which such trading is done; (6) whether the 
broker-dealer operator or any of its affiliates use a SOR(s) (or 
similar functionality), an algorithm(s), or both to send or receive 
orders or other trading interest to or from the NMS Stock ATS, and the 
interaction or coordination between the SOR(s) (or similar 
functionality) or algorithm(s) and the NMS Stock ATS; (7) whether there 
are any employees of the broker-dealer operator that service the 
operations of the NMS Stock ATS that also service any other business 
unit(s) of the broker-dealer operator or any affiliate(s) other than 
the NMS Stock ATS, and the roles and responsibilities of such shared 
employees; (8) whether any operation, service, or function of the NMS 
Stock ATS is performed by any

[[Page 81090]]

person(s) other than the broker-dealer operator, a description of such 
operation, service, or function, and whether those person(s), or any of 
their affiliates, may enter orders or other trading interest on the NMS 
Stock ATS; (9) whether the NMS Stock ATS makes available or applies any 
service, functionality, or procedure of the NMS Stock ATS to the 
broker-dealer operator or its affiliates that is not available or does 
not apply to a subscriber(s) to the NMS Stock ATS and a description of 
such service, functionality, or procedure; and (10) a description of 
the written safeguards and written procedures to protect the 
confidential trading information of subscribers to the NMS Stock ATS, 
including (a) a description of the means by which a subscriber can 
consent or withdraw consent to the disclosure of confidential trading 
information, (b) identification of the positions or titles of any 
persons that have access to confidential trading information, the type 
of confidential trading information those persons can access, and the 
circumstances under which they can access it, (c) a description of the 
written standards controlling employees of the NMS Stock ATS trading 
for their own accounts, and (d) a description of the written oversight 
procedures to ensure that the ATS's Rule 301(b)(10) safeguards and 
procedures are implemented and followed.
    Part IV of proposed Form ATS-N would require an NMS Stock ATS to 
provide certain disclosures related to the manner of operations of the 
NMS Stock ATS. Part IV consists of 15 items, which are summarized here, 
and explained in greater detail below in the discussion of the 
estimated burdens related to each disclosure requirement. Part IV of 
proposed Form ATS-N would include disclosures relating to: (1) 
Subscribers to the NMS Stock ATS, including any eligibility 
requirements to gain access to the services of the ATS, the terms or 
conditions of any contractual agreement for access, the types of 
subscribers and other persons that use the services of the ATS, any 
formal or informal arrangement the NMS Stock ATS may have with a 
subscriber or person to provide liquidity to the ATS (including the 
terms and conditions of each arrangement and the identity of any 
liquidity provider that is an affiliate of the broker-dealer operator), 
the circumstances by which a subscriber or other person may be limited 
or denied access to the NMS Stock ATS, and any differences in the 
treatment of different subscribers and persons with respect to 
eligibility, terms and conditions of use, criteria for distinguishing 
among subscribers or other persons, and limitations and denials of 
access; (2) the days and hours of operation of the NMS Stock ATS, 
including the times when orders or other trading interest are entered 
and the time when pre-opening or after-hours trading occur, and whether 
there are any differences in when orders or other trading interest may 
be entered by different subscribers or persons; (3) the order types and 
modifiers entered on the NMS Stock ATS, including their 
characteristics, operations, how they are ranked and executed on the 
ATS (such as priority vis-[agrave]-vis other orders), eligibility and 
conditions for routing to other trading centers, the available time-in-
force instructions for each order type, whether the availability and 
terms and conditions of each order type is the same for all subscribers 
and persons, any requirements and handling procedures for minimum order 
sizes, odd-lot orders or mixed-lot orders, including whether such 
requirements and procedures are the same for all subscribers and 
persons, and any messages sent to or received by the NMS Stock ATS 
indicating trading interest, including any differences in the terms and 
conditions for such messages for different subscribers and persons; (4) 
the means by which subscribers and other persons connect to the NMS 
Stock ATS and enter orders or other trading interest on the NMS Stock 
ATS (e.g., direct FIX connection or indirect connection via the broker-
dealer operator's SOR or any intermediate functionality, algorithm or 
sales desk); any co-location services or other means by which any 
subscriber or other persons may enhance the speed by which to send or 
receive orders, trading interest, or messages to or from the NMS Stock 
ATS; and any differences in the terms and conditions for connecting and 
entering trading interest or co-location services for different 
subscribers or persons; (5) the segmentation of orders or other trading 
interest on the NMS Stock ATS and notice about segmentation to 
subscribers or persons, including the criteria used to segment orders 
or other trading interest on the NMS Stock ATS, any notice provided to 
subscribers or persons about the segmented category that a subscriber 
or a person is assigned, any differences in segmentation (or notice 
about segmentation) for different subscribers or persons, and order 
preferencing and its effect on order priority and interaction; (6) the 
means and circumstances by which orders or other trading interest on 
the NMS Stock ATS are displayed or made known outside the NMS Stock 
ATS, type of information displayed, any differences in display for 
different subscribers and persons, and to whom orders and trading 
interest is displayed; (7) the trading services of the NMS Stock ATS, 
including the means used by the ATS to bring multiple buy and sell 
orders together, the established, non-discretionary methods dictating 
the terms of trading on the facilities of the NMS Stock ATS, trading 
procedures related to price protection mechanisms, short sales, locked-
crossed markets, the handling of execution errors, time-stamping of 
orders and executions, or price improvement functionality, and any 
differences for different subscribers and persons; (8) the procedures 
governing trading in the event the NMS Stock ATS suspends trading or 
experiences a system disruption or malfunction, including any 
differences in the procedures among subscribers and persons; (9) the 
opening, reopening or closing processes, or after-hours trading 
procedures of the NMS Stock ATS; (10) the circumstances under which 
orders or other trading interest are routed from the NMS Stock ATS to 
another trading center, and any differences in the means by which 
orders are routed among subscribers and persons; (11) the market data 
used by the NMS Stock ATS and the source of that market data, and the 
specific purpose for which market data is used by the ATS, including 
how it is used to determine the NBBO; (12) the fees, rebates, or other 
charges of the NMS Stock ATS and whether such fees are not the same for 
all subscribers and persons; (13) arrangements or procedures for trade 
reporting of transactions on the NMS Stock ATS, and arrangements or 
procedures undertaken by the NMS Stock ATS to facilitate the clearance 
and settlement of transaction on the ATS, including any differences in 
these procedures among subscribers and persons; (14) information 
related to the NMS Stock ATS's order display and execution obligations 
under Rule 301(b)(3) of Regulation ATS, if applicable; (15) information 
related to the NMS Stock ATS's obligations under the fair access 
requirements of Rule 301(b)(5) of Regulation ATS, if applicable; and 
(16) aggregate market quality statistics published or provided to one 
or more subscribers.
    Part V of proposed Form ATS-N would require an NMS Stock ATS to 
provide certain basic information about the point of contact for the 
NMS Stock ATS, such as the point of contact's name, title, telephone 
number and email

[[Page 81091]]

address. Part V would also require the NMS Stock ATS to consent to 
service of any civil action brought by, or any notice of any proceeding 
before, the Commission or an SRO in connection with the ATS's 
activities.
    The Commission proposes that Form ATS-N would be filed 
electronically and require an electronic signature. Consequently, the 
proposed amendments to Regulation ATS would require that every NMS 
Stock ATS have the ability to file forms electronically with an 
electronic signature. The Commission preliminarily believes that most, 
if not all, ATSs that transact in NMS stock currently have the ability 
to access and submit an electronic form such that the requirement to 
file Form ATS-N electronically with an electronic signature would not 
impose new implementation costs. The burdens related to electronic 
submission and providing an electronic signature are included in the 
burden hour estimates provided below.
    In addition, the Commission proposes to amend Rule 303(a)(2)(ii) 
\568\ of Regulation ATS to provide that all ATSs must preserve copies 
of all reports filed pursuant to Rule 304, which includes Form ATS-N 
filings, for the life of the enterprise and any successor enterprise.
---------------------------------------------------------------------------

    \568\ 17 CFR 242.303(a)(2)(ii).
---------------------------------------------------------------------------

    Furthermore, under this proposal, an ATS that effects transactions 
in both NMS stocks and non-NMS stocks would be required to file both a 
Form ATS-N with respect to its trading of NMS stocks and a revised Form 
ATS that removes discussion of those aspects of the ATS related to the 
trading of NMS stocks. The ATS would also be required to file two Forms 
ATS-R--one to report its trading volume in NMS stocks and another to 
report its trading volume in non-NMS stocks.

B. Proposed Use of Information

1. Proposed Amendments to Rules 301(b)(10) of Regulation ATS
    As noted above, the proposed amendments to Rule 301(b)(10) of 
Regulation ATS would require all ATSs to have in place written 
safeguards and written procedures to protect subscribers' confidential 
trading information. Proposed Rule 303(a)(1)(v) of Regulation ATS would 
require all ATSs to preserve at least one copy of those written 
safeguards and written procedures.
    The Commission preliminarily believes that both the Commission and 
the SRO of which the ATS's broker dealer-operator is a member will use 
these written safeguards and written procedures in order to better 
understand how each ATS protects subscribers' confidential trading 
information from unauthorized disclosure and access. The Commission 
preliminarily believes that the information contained in the records 
required to be preserved by proposed Rule 303(a)(1)(v) would be used by 
examiners and other representatives of the Commission, state securities 
regulatory authorities, and SROs to evaluate whether ATSs are in 
compliance with Regulation ATS as well as other applicable rules and 
regulations. The Commission also preliminarily believes that the 
proposed requirements to memorialize in writing the safeguards and 
procedures to protect subscribers' confidential trading information 
would assist ATSs in more effectively complying with their existing 
legal requirements under Regulation ATS; in particular, the 
requirements to protect the confidentiality of subscribers' trading 
information under Rule 301(b)(10) of Regulation ATS.
2. Proposed Rules 301(b)(2)(viii), 304 of Regulation ATS, Including 
Proposed Form ATS-N, and 301(b)(9)
    Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS would 
require each NMS Stock ATS to file a Form ATS-N, Form ATS-N Amendments, 
and a notice of cessation on proposed Form ATS-N.\569\ As noted above, 
proposed Form ATS-N would require information regarding the broker-
dealer operator of the NMS Stock ATS and, in some instances affiliates 
of the broker-dealer operator, and the operation of the NMS Stock ATS, 
including detailed disclosures regarding the ATS's method of operation, 
order types and access criteria. Additionally, an ATS that effects 
transactions in both NMS stocks and non-NMS stocks would be required to 
file both a Form ATS-N with respect to its trading of NMS stocks and a 
revised Form ATS that removes discussion of those aspects of the ATS 
relating to the trading of NMS stocks.\570\ Under the proposed 
amendments to Rule 301(b)(9), an ATS that effects trades in both NMS 
stocks and non-NMS stocks would be required to file two Forms ATS-Rs--
one reporting its trading volume in NMS stocks and the other reporting 
its trading volume in non-NMS stocks.\571\ The information filed on 
proposed Form ATS-N would be publicly available on the Commission's Web 
site and each NMS Stock ATS would be required to post on the NMS Stock 
ATS's Web site a direct URL hyperlink to the Commission's Web site that 
contains the documents enumerated in proposed Rule 304(b)(2), but 
information filed on Forms ATS and ATS-R would be kept confidential, 
subject to the provisions of current applicable law.
---------------------------------------------------------------------------

    \569\ Specifically, proposed Rule 304(a)(1) would require an NMS 
Stock ATS to file a Form ATS-N prior to the NMS Stock ATS commencing 
operations. Proposed Rule 304(a)(2)(i) would require an NMS Stock 
ATS to file amendments to its proposed Form ATS-N: (A) At least 30 
calendar days prior to the date of implementation of a material 
change to the operations of the NMS Stock ATS or to the activities 
of the broker-dealer operator or its affiliates that are subject to 
disclosure on Form ATS-N; (B) within 30 calendar days after the end 
of each calendar quarter to correct any other information on 
proposed Form ATS-N that has become inaccurate; or (C) promptly, to 
correct any information on proposed Form ATS-N that was inaccurate 
when originally filed. Proposed Rule 304(a)(3) would require an NMS 
Stock ATS to notice its cessation of operations at least 10 business 
days before the date on which the NMS Stock ATS ceases operation.
    \570\ See proposed Rule 301(b)(2)(viii).
    \571\ See proposed Rule 301(b)(9).
---------------------------------------------------------------------------

    The Commission preliminarily believes that market participants 
would use the information publicly disclosed on proposed Form ATS-N to 
source, evaluate, and compare and contrast information about different 
NMS Stock ATSs, including information relating to the broker-dealer 
operator and any potential conflicts of interests it may have with 
respect to its operation of the NMS Stock ATS. The Commission also 
preliminarily believes that market participants would use the 
information publicly disclosed on proposed Form ATS-N to source, 
evaluate, and compare and contrast information about, among other 
things, an NMS Stock ATS's eligibility requirements, trading hours, 
order types, connection and order entry functionalities, segmentation 
of order flow, display of orders and other trading interests, trading 
platform functionality, procedures governing trading during a 
suspension of trading, system disruption, or system malfunction, 
opening, closing, and after-hours trading processes or procedures, 
routing procedures, market data usages and sources, fees, trade 
reporting, clearing, and settlement, order display and execution access 
standards, fair access standards, and market quality statistics 
published or provided to one or more subscribers. Accordingly, the 
Commission preliminarily believes that market participants would use 
the information disclosed on proposed Form ATS-N to better evaluate to 
which trading venue they may want to subscribe and/or route orders for 
execution in order to accomplish their investing or trading objectives.
    The Commission preliminarily believes it will use the information

[[Page 81092]]

disclosed on proposed Form ATS-N, Form ATS, and Form ATS-R to oversee 
the growth and development of NMS Stock ATSs, including those that also 
effect transactions in non-NMS stocks, and to evaluate whether those 
systems operate in a manner consistent with the federal securities laws 
should the disclosures provided on Form ATS-N reveal potential non-
compliance with federal securities laws. In particular, the Commission 
preliminarily believes that the information collected and reported to 
the Commission by NMS Stock ATSs would enable the Commission to 
evaluate better the operations of NMS Stock ATSs with regard to the 
Commission's duty under the Exchange Act to remove impediments to and 
perfect the mechanisms of a national market system for securities \572\ 
and evaluate the competitive effects of these systems to ascertain 
whether the regulatory framework remains appropriate to the operation 
of such systems. The information provided on Form ATS-N should also 
assist the SRO for the broker-dealer operator in exercising oversight 
over the broker-dealer operator. For example, by having to describe 
their safeguards and procedures to protect the confidential trading 
information of subscribers, and knowing that such descriptions will be 
public, NMS Stock ATSs may be encouraged to carefully consider the 
adequacy of their means of protecting the confidential trading 
information of subscribers.
---------------------------------------------------------------------------

    \572\ See 15 U.S.C. 78b (providing that the necessity for the 
Exchange Act is, among other things, ``to require appropriate 
reports, to remove impediments to and perfect the mechanisms of a 
national market system for securities . . . and to impose 
requirements necessary to make such regulation and control 
reasonably complete and effective . . .'').
---------------------------------------------------------------------------

    The Commission also proposes to amend Rule 303(a)(2)(ii) of 
Regulation ATS to provide that all ATSs must preserve copies of all 
reports filed pursuant to proposed Rule 304 for the life of the 
enterprise and any successor enterprise. The Commission preliminarily 
believes that the information contained in the records required to be 
preserved by the proposed amendment to Rule 303(a)(2)(ii) would be used 
by examiners and other representatives of the Commission, state 
securities regulatory authorities, and SROs to evaluate whether ATSs 
are in compliance with Regulation ATS as well as other applicable rules 
and regulations.

C. Respondents

    The ``collection of information'' requirements under the proposed 
amendments to Regulation ATS relating to Rule 301(b)(10) and proposed 
Rule 303(a)(1)(v), as described above, would apply to all ATSs, 
including NMS Stock ATSs. The ``collection of information'' 
requirements under the proposed amendments to Regulation ATS relating 
to proposed Rule 304, Form ATS-N, and the proposed amendments to Rule 
303(a)(2)(ii), as described above, would apply only to NMS Stock ATSs, 
and the ``collection of information'' requirements under the proposed 
amendments to Rule 301(b)(9), as described above, would apply to NMS 
Stock ATSs that also effect trades in both NMS stocks and non-NMS 
stocks.
    Currently, there are 84 ATSs that have filed Form ATS with the 
Commission. Of these 84 ATSs, 46 would meet the definition of an NMS 
Stock ATS.\573\ Accordingly, the Commission estimates that 84 entities 
would be required to comply with the proposed amendments related to 
Rule 301(b)(10) of Regulation ATS and 46 entities would be required to 
complete Form ATS-N.\574\
---------------------------------------------------------------------------

    \573\ Data compiled from Form ATS submitted to the Commission as 
of November 1, 2015. That is, 46 ATS have disclosed on their Form 
ATS that they trade or expect to trade NMS stock.
    \574\ The Commission recognizes that there may be new entities 
that will seek to become ATSs, or NMS Stock ATSs, that would be 
required to comply with the proposed amendments to Rule 301(b)(10). 
From 2012 through the first half of 2015, there has been an average 
of 8 Form ATS initial operation reports filed each year with the 
Commission. Similarly, there may be some ATSs that may cease 
operations in the normal course of business or possibly in response 
to the proposed amendments to Regulation ATS. From 2012 through the 
first half of 2015, there has been an average of 11 ATSs, including 
those that trade NMS stocks, that have ceased operations. For the 
purposes of this paperwork burden analysis, the Commission assumes 
that there are 84 respondents that would be required to comply with 
the proposed amendments to Rule 301(b)(10), if adopted. The 
Commission is estimating that the number of entities that may file a 
Form ATS initial operation report would generally offset any ATSs 
that may file a Form ATS cessation of operations report.
---------------------------------------------------------------------------

    In addition, the Commission notes that there are currently 11 ATSs 
that trade, or have indicated in Exhibit B to their Form ATS that they 
expect to trade, both NMS stocks and non-NMS stocks on the ATS.\575\ 
Under the proposed amendments to Regulation ATS, these 11 entities 
would be required to file a Form ATS-N to disclose information about 
their NMS stock activities and file a Form ATS to disclose information 
about their non-NMS stock activities. Consequently, these 11 ATSs would 
have to amend their Forms ATS to remove discussion of those aspects of 
the ATS related to the trading of NMS stocks and on an ongoing basis, 
file separate Forms ATS-R to report trading volume in NMS stocks and 
trading volume in non-NMS stocks.\576\
---------------------------------------------------------------------------

    \575\ Data compiled from Forms ATS and ATS-R submitted to the 
Commission as of November 1, 2015. These 11 ATSs are included within 
the 46 NMS Stock ATSs.
    \576\ Pursuant to Rule 301(b)(9), all ATSs are required to file 
Form ATS-R within 30 calendar days after the end of each calendar 
quarter in which the market has operated, and within 10 calendar 
days after the ATS ceases to operate. For ATSs that trade both NMS 
stocks and non-NMS stocks, the ATS would report its transactions in 
NMS stocks on one Form ATS-R, and its transaction volume in other 
securities on a separate Form ATS-R.
---------------------------------------------------------------------------

    With respect to proposed Form ATS-N, the Commission recognizes 
there may be entities that might file a Form ATS-N to operate an NMS 
Stock ATS in the future. From 2012 through the first half of 2015, 
there has been an average of 2 new ATSs per year that disclose that 
they trade or expect to trade NMS stocks on their initial operation 
reports, which would therefore fall within the proposed definition of 
an NMS Stock ATS. Similarly, some ATSs that currently trade NMS stocks 
may choose to cease operations rather than comply with the proposed 
amendments requiring them to file proposed Form ATS-N. Other ATSs may 
choose to cease operations in the normal course of business. From 2012 
through the first half of 2015, there has been an average of 6 ATSs 
that trade NMS stocks that have ceased operations each year.
    The Commission preliminarily believes that most ATSs that currently 
trade NMS stocks would continue to operate notwithstanding the proposed 
amendments to Regulation ATS. For the purposes of this analysis of the 
paperwork burden associated with the proposed amendments to Regulation 
ATS, the Commission assumes that there will be 46 respondents. The 
Commission preliminarily believes that this number is reasonable, as it 
assumes that most ATSs that currently trade NMS stocks would file a 
Form ATS-N with the Commission, and acknowledges that there may be some 
ATSs that cease operations altogether and other entities that may 
choose to commence operations as an NMS Stock ATS. Based on the number 
of initial filings and cessation of operations reports on current Form 
ATS for ATSs that trade NMS stocks described above, the Commission 
estimates that, 2 to 3 new entities will file to become an NMS Stock 
ATS and 4 to 6 NMS Stock ATSs will cease operations in each of the next 
three years.

[[Page 81093]]

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Proposed Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS
a. Baseline Measurements
    Under current Rule 301(b)(10) of Regulation ATS,\577\ all ATSs must 
establish adequate safeguards and procedures to protect subscribers' 
confidential trading information, as well as oversight procedures to 
ensure such safeguards and procedures are followed. As discussed below, 
the Commission preliminarily believes that ATSs--in particular, ATSs 
whose broker-dealer operators are large, multi-service broker-dealers--
generally have and maintain in writing their safeguards and procedures 
to protect subscribers' confidential trading information, as well as 
the oversight procedures to ensure such safeguards and procedures are 
followed.\578\ However, neither Rule 301(b)(10) nor Rule 303(a)(1) of 
Regulation ATS currently requires that an ATS have and preserve those 
safeguards and procedures in writing.
---------------------------------------------------------------------------

    \577\ 17 CFR 242.301(b)(10).
    \578\ See infra Section XIII.B.4.
---------------------------------------------------------------------------

    For ATSs that currently have and preserve in written format the 
safeguards and procedures to protect subscribers' confidential trading 
information under Rule 301(b)(10) of Regulation ATS, the Commission 
preliminarily estimates that the average annual burden they voluntarily 
undertake to update and preserve those written safeguards and written 
procedures is 4 hours.\579\ Because neither current Rule 301(b)(1) nor 
current Rule 303(a)(1) requires an ATS to have and preserve its 
safeguards and procedures to protect subscribers' confidential trading 
information in writing, this burden is not reflected in the current PRA 
baseline burdens for Rules 301 and 303.\580\ As such, in accordance 
with the below analysis, the Commission would modify the current PRA 
burdens for Rules 301 and 303 to account for the proposed requirement 
that ATSs have and preserve in written format the safeguards and 
procedures to protect subscribers' confidential trading 
information.\581\
---------------------------------------------------------------------------

    \579\ Attorney at 2 hours + Compliance Clerk at 2 hours = 4 
burden hours. For ATSs that do not have their safeguards and 
procedures or oversight procedures in a written format, these firms 
would incur a one-time initial burden to record their safeguards and 
procedures as well as their oversight procedures in a written format 
as described below.
    \580\ See FR Doc. 2014-02143, 79 FR 6236 (February 3, 2014) 
(Request to OMB for Extension of Rule 301 and Forms ATS and ATS-R; 
SEC File No. 270-451; OMB Control No. 3235-0509) (hereinafter ``Rule 
301 PRA Update''); FR Doc. 2013-17474, 78 FR 43943 (July 22, 2013) 
(Request to OMB for Extension of Rule 303; SEC File No. 270-450; OMB 
Control No. 3235-0505) (hereinafter ``Rule 303 PRA Update'').
    \581\ See infra note 587 and accompanying text.
---------------------------------------------------------------------------

b. Burden
    The Commission recognizes that proposed Rules 301(b)(10) and 
303(a)(1)(v) of Regulation ATS would impose certain burdens on 
respondents. For ATSs that currently have and preserve in written 
format the safeguards and procedures to protect subscribers' 
confidential trading information and written oversight procedures to 
ensure such safeguards and procedures are followed, the Commission 
preliminarily believes that there will be no increased burden under the 
proposed amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation 
ATS. The Commission preliminarily believes that the current practices 
of those ATSs would already be in compliance with the proposed rules. 
Therefore, the proposed amendments should not require those ATSs to 
take any measures or actions in addition to those currently undertaken.
    For ATSs that have not recorded in writing their safeguards and 
procedures to protect subscribers' confidential trading information and 
oversight procedures to ensure such safeguards and procedures are 
followed, there will be an initial, one-time burden to memorialize them 
in a written document(s). The Commission preliminarily estimates that 
an ATS's initial, one-time burden to put in writing its safeguards and 
procedures to protect subscribers' confidential trading information and 
the oversight procedures to ensure such safeguards and procedures are 
followed would be approximately 8 hours,\582\ but the Commission 
preliminarily estimates that the burden could range between 5 and 10 
hours.\583\ Because ATSs are already required to have safeguards and 
procedures to protect subscribers' confidential trading information and 
to have oversight procedures to ensure such safeguards and procedures 
are followed, the Commission preliminarily believes that recording 
these items in a written format would not impose a substantial burden 
on ATSs. Consequently, the Commission preliminarily believes that ATSs 
would rely on internal staff to record the ATS's Rule 301(b)(10) 
procedures in writing. The Commission preliminarily estimates that, of 
the 84 current ATSs, 15 ATSs might not have their safeguards and 
procedures to protect subscribers' confidential trading information or 
oversight procedures to ensure such safeguards and procedures are 
followed in writing, and would therefore be subject to this one-time 
initial burden.\584\ Accordingly, the Commission preliminarily 
estimates that the aggregate initial, one-time burden on all ATSs would 
be 150 hours based on the Commission's highest approximation of the 
additional burden per ATS.\585\
---------------------------------------------------------------------------

    \582\ Attorney at 7 hours + Compliance Clerk at 1 hour = 8 
burden hours.
    \583\ Attorney at 4-9 hours + Compliance Clerk at 1 hour = 5-10 
burden hours.
    \584\ It is likely that most, if not all, ATSs fulfill their 
Rule 301(b)(10) obligations in writing, given the practical 
difficulty in ensuring such safeguards and procedures, as well as 
oversight procedures, are ``adequate,'' as required under Rule 
301(b)(10), and contain all necessary components. The Commission 
solicits comment on the accuracy of this estimate.
    \585\ (Attorney at 9 hours + Compliance Clerk at 1 hour) x (15 
ATSs) = 150 burden hours. See supra note 583 and accompanying text.
---------------------------------------------------------------------------

    As explained above, the Commission preliminarily estimates that the 
average annual, ongoing burden per ATS to update and preserve written 
safeguards and written procedures to protect subscribers' confidential 
trading information, as well as to update and preserve the written 
standards controlling employees of the ATS trading for their own 
account and the written oversight procedures, would be 4 hours.\586\ As 
a result, the Commission preliminarily estimates that the total 
aggregate, ongoing burden per year for all ATSs would be 336 
hours,\587\ and thus, the Commission is modifying the current PRA 
burden estimates for Rules 301 and 303 to account for this increased 
burden on ATSs.
---------------------------------------------------------------------------

    \586\ See supra note 579 and accompanying text.
    \587\ (Attorney at 2 hours + Compliance Clerk at 2 hours) x 84 
ATSs = 336 burden hours.
---------------------------------------------------------------------------

2. Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including 
Proposed Form ATS-N
a. Baseline Measurements
    Currently, Rule 301(b)(2)(i) of Regulation ATS \588\ requires an 
ATS to file an initial operation report on current Form ATS at least 20 
days prior to commencing operation as an alternative trading system. 
Current Form ATS requires information regarding the operation of the 
ATS, including, among other things, classes of subscribers, the types 
of securities traded, the outsourcing of operations of the ATS to other 
entities, the procedures governing the entry of orders, the means of 
access to the ATS, and procedures governing execution and reporting. 
Regarding amendments to an existing Form ATS, Rule 301(b)(2)(ii) of 
Regulation ATS \589\

[[Page 81094]]

requires an ATS to file amendments to its current Form ATS at least 20 
calendar days prior to implementing a material change to its 
operations. Rule 301(b)(2)(iii) of Regulation ATS \590\ requires an ATS 
to file amendments to its current Form ATS within 30 calendar days 
after the end of each calendar quarter if any information contained in 
its initial operation report becomes inaccurate and has not been 
previously reported to the Commission.\591\ Regarding shutting down an 
ATS, Rule 301(b)(2)(v) of Regulation ATS \592\ requires an ATS to 
promptly file a cessation of operation report on current Form ATS upon 
ceasing operations as an ATS.
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    \588\ 17 CFR 242.301(b)(2)(i).
    \589\ 17 CFR 242.301(b)(2)(ii).
    \590\ 17 CFR 242.301(b)(2)(iii).
    \591\ In addition, Rule 301(b)(2)(iv) requires an ATS to 
promptly file an amendment on current Form ATS after the discovery 
that any information previously filed on current Form ATS was 
inaccurate when filed. 17 CFR 242.301(b)(2)(iv).
    \592\ 17 CFR 242.301(b)(2)(v).
---------------------------------------------------------------------------

    The Commission's currently approved estimate for an initial 
operation report on current Form ATS is 20 hours to gather the 
necessary information, provide the required disclosures in Exhibits A 
through I, and submit the Form ATS to the Commission.\593\ With respect 
to Form ATS amendments, the Commission understands, based on the review 
of Form ATS amendments by the Commission and its staff, that ATSs that 
trade NMS stocks typically amend their Form ATS on average twice per 
year.\594\ The frequency and scope of Form ATS amendments vary 
depending on whether the ATS is implementing a material change or a 
periodic change. Some ATSs may not change the manner in which they 
operate or anything else that might require an amendment to Form ATS in 
a given year while others may implement a number of changes during a 
given year that require Form ATS amendments. The Commission estimates 
that the current average compliance burden for each amendment to Form 
ATS is approximately 6 hours.\595\ Accordingly, the estimated average 
annual ongoing burden of updating and amending Form ATS is 
approximately 12 hours per NMS Stock ATS.\596\ With respect to ceasing 
operations, the currently approved average estimated compliance burden 
for an ATS to complete a cessation of operations report is 2 hours to 
check the appropriate box on Form ATS and send the cessation of 
operations report to the Commission.\597\ The Commission's currently 
approved estimate for the average compliance burden for each Form ATS-R 
filing is 4 hours.\598\
---------------------------------------------------------------------------

    \593\ Attorney at 13 hours + Compliance Clerk at 7 hours = 20 
burden hours. See Rule 301 PRA Update, supra note 580, 79 FR 6237.
    \594\ See id.
    \595\ Attorney at 4.5 hours + Compliance Clerk at 1.5 hours = 6 
burden hours. See id.
    \596\ 2 Form ATS Amendments filed annually x 6 burden hours per 
Form ATS Amendment = 12 burden hours per ATS.
    \597\ Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2 
burden hours. See id.
    \598\ Attorney at 3 hours + Compliance Clerk at 1 hour = 4 
burden hours. See id.
---------------------------------------------------------------------------

b. Burdens
    The Commission recognizes that proposed Rules 301(b)(2)(viii) and 
304 of Regulation ATS, including proposed Form ATS-N, would impose 
certain burdens on respondents.\599\ Although the Commission 
preliminarily believes that many of the disclosures required by 
proposed Form ATS-N are currently required by Form ATS, proposed Form 
ATS-N would require an NMS Stock ATS to provide significantly more 
detail in those disclosures than currently is required by Form ATS. 
Proposed Form ATS-N would also require additional disclosures not 
currently mandated by current Form ATS such as those contained in Part 
III of proposed Form ATS-N. Under the proposed amendments to Regulation 
ATS, NMS Stock ATSs would be required to complete and file the enhanced 
and additional disclosures on proposed Form ATS-N.\600\ Section 
XII.D.2.b.i below provides the estimated burden above the current Form 
ATS baseline of each item of proposed Form ATS-N. The Commission notes 
that many of the proposed disclosure items on proposed Form ATS-N are 
already required disclosures by respondents in whole or in part on 
current Form ATS, while other disclosure items on proposed Form ATS-N 
are novel (i.e., current Form ATS does not require some form of the 
proposed disclosure). Section XII.D.2.b.ii aggregates these new burdens 
and the additional burdens above the current Form ATS baseline that 
will be imposed by proposed Form ATS-N.
---------------------------------------------------------------------------

    \599\ In establishing the estimates below with respect to 
proposed Form ATS-N, the Commission has considered its estimate of 
the burden for an SRO to amend a Form 19b-4. Specifically, the 
Commission estimated that 34 hours is the amount of time required to 
complete an average rule filing and 129 hours is the amount of time 
required to complete a complex rule filing, and three hours is the 
amount of time required to complete an average amendment to a rule 
filing. See Securities Exchange Act Release No. 50486 (October 4, 
2004), 69 FR 60287 (October 8, 2004), 60294.
    \600\ These disclosures would be provided on proposed Form ATS-N 
and may have to be amended periodically as provided in proposed Rule 
304.
---------------------------------------------------------------------------

i. Analysis of Estimated Additional Burden for Proposed Form ATS-N
    Parts I and II of proposed Form ATS-N would require disclosure of 
certain general information regarding the broker-dealer operator and 
the NMS Stock ATS. Part I of proposed Form ATS-N would require the NMS 
Stock ATS to state the name of its broker-dealer operator, the name 
under which the NMS Stock ATS conducts business, if any, the MPID of 
the NMS Stock ATS, and whether it is an NMS Stock ATS operating 
pursuant to a previously filed initial operation report on Form ATS. 
Part II of proposed Form ATS-N would require the address of the 
physical location of the NMS Stock ATS matching system and the NMS 
Stock ATS's mailing address. Part II of proposed Form ATS-N would also 
require registration information of the broker-dealer operator, 
including its SEC File Number, the effective date of the broker-dealer 
operator's registration with the Commission, its CRD Number, the name 
of its national securities association, and the effective date of the 
broker-dealer operator's membership with the national securities 
association. In addition, Part II of proposed Form ATS-N would require 
disclosure of certain information regarding the legal status of the 
broker-dealer operator and would require the NMS Stock ATS to provide a 
URL address to its Web site. Finally, Part II would require the NMS 
Stock ATS to attach Exhibit 1 (a copy of any materials provided to 
subscribers or any other persons related to the operations of the NMS 
Stock ATS or the disclosures on Form ATS-N), Exhibit 2A (a copy of the 
most recently filed or amended Schedule A of the broker-dealer 
operator's Form BD disclosing information related to direct owners and 
executive officers), and Exhibit 2B (a copy of the most recently filed 
or amended Schedule B of the broker-dealer operator's Form BD 
disclosing information related to indirect owners). In lieu of 
attaching those exhibits to Form ATS-N, the NMS Stock ATSs would be 
able to provide a URL address to where the required documents can be 
found.
    Under current Form ATS, an ATS is required to provide all of the 
information that would be required under Parts I and II of proposed 
Form ATS-N with the exception of: (1) Its Web site address; (2) the 
effective date of the broker-dealer operator's registration with the 
Commission; (3) the name of the national securities association and 
effective date of the broker-dealer operator's membership with the 
national securities association;

[[Page 81095]]

(4) the MPID of the NMS Stock ATS; (5) the broker-dealer operator's 
legal status (e.g., corporation or partnership); (6) the date of 
formation and the state in which the broker-dealer operator was formed; 
and (7) copies of the broker-dealer operator's most recently filed or 
amended Schedules A and B of Form BD.\601\ Current Form ATS, however, 
requires an ATS to provide a copy of its governing documents, such as 
its constitution and bylaws,\602\ which would not be required in 
proposed Form ATS-N. The Commission preliminarily believes that all 
ATSs currently have access to all of these items because such 
information is germane to the operation of its broker-dealer operator. 
Accordingly, the Commission preliminarily estimates that, on average, 
preparing Parts I and II for a Form ATS-N would add 0.5 hours to the 
current baseline for an initial operation report on current Form ATS. 
The aggregate initial burden on all NMS Stock ATSs to complete Parts I 
and II of proposed Form ATS-N would be 23 hours above the current 
baseline.\603\
---------------------------------------------------------------------------

    \601\ Exhibit I of Current Form ATS requires ATS to provide a 
list with the full legal name of those direct owners reported on 
Schedule A of Form BD, but not a copy of Schedule A.
    \602\ Exhibit D of Form ATS requires an ATS to provide a copy of 
its constitution, articles of incorporation or association, with all 
amendments, and of the existing bylaws or corresponding rules or 
instruments, whatever the name.
    \603\ Compliance Clerk at 0.5 hours x 46 NMS Stock ATSs = 23 
burden hours.
---------------------------------------------------------------------------

    Part III, Item 1 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether or not the broker-dealer operator or any of its 
affiliates operate or control any non-ATS trading center(s), and if so, 
to (1) identify the non-ATS trading center(s); and (2) describe any 
interaction or coordination between the identified non-ATS trading 
center(s) and the NMS Stock ATS including: (i) Circumstances under 
which subscriber orders or other trading interest sent to the NMS Stock 
ATS are displayed or otherwise made known to the identified non-ATS 
trading center(s) before entering the NMS Stock ATS; (ii) circumstances 
under which subscriber orders or other trading interest received by the 
broker-dealer operator or its affiliates may execute, in whole or in 
part, in the identified non-ATS trading center(s) before entering the 
NMS Stock ATS; and (iii) circumstances under which orders or other 
trading interest are removed from the NMS Stock ATS and sent to the 
identified non-ATS trading center(s). Under Proposed Form ATS-N, 
affiliates of the broker-dealer operator would only include any person 
that, directly or indirectly, controls, is under common control with, 
or is controlled by, the broker-dealer operator. The affiliates of the 
broker-dealer operator that might operate non-ATS trading centers under 
this proposal would thus be ``control affiliates'' that are either 
controlled by the broker-dealer operator or under common control with 
another entity. Consequently, because the broker-dealer operator would 
control all affiliates or would be under common control with those 
affiliates, the broker-dealer operator should be aware of whether its 
affiliates operate a non-ATS trading center or in most instances, 
should otherwise be able to readily obtain such information from its 
affiliates.\604\
---------------------------------------------------------------------------

    \604\ To the extent the broker-dealer operator is currently 
unaware of whether its affiliates operate a non-ATS trading center, 
the Commission preliminarily believes that the broker-dealer 
operator could readily obtain this information from its affiliates.
---------------------------------------------------------------------------

    To the extent the operation of a non-ATS trading center operated or 
controlled by the broker-dealer operator or any of its affiliates does 
not interact with the NMS Stock ATS (e.g., the two platforms do not 
share order flow or route trading interest between one another), the 
proposed disclosure requirement in Part III, Item 1, would require only 
that the NMS Stock ATS identify the non-ATS trading center in Item 1(a) 
and note that that there is no interaction between the non-ATS trading 
center and the NMS Stock ATS in Item 1(b). To the extent the operation 
of a non-ATS trading center of the broker-dealer operator or its 
affiliates interacts with the NMS Stock ATS, the Commission 
preliminarily believes that the NMS Stock ATS would likely already be 
aware of how such operation may interact with the NMS Stock ATS. If 
there is substantial interaction between the non-ATS trading center and 
the NMS Stock ATS, the burden related to this disclosure would be 
higher.
    The Commission understands that most, but not all, broker-dealer 
operators of NMS Stock ATSs currently, either by themselves or through 
their affiliates, operate or control a non-ATS trading center. The 
Commission preliminarily estimates that, on average, preparing Part 
III, Item 1 for a Form ATS-N would add 10 hours to the current baseline 
for an initial operation report on current Form ATS. This would result 
in an aggregate initial burden of 460 hours above the baseline for all 
NMS Stock ATSs to complete Part III, Item 1 of proposed Form ATS-
N.\605\
---------------------------------------------------------------------------

    \605\ (Attorney at 8 hours + Compliance Manager at 2 hours) x 46 
NMS Stock ATSs = 460 burden hours.
---------------------------------------------------------------------------

    Part III, Item 2 of proposed Form ATS-N would require an NMS Stock 
ATS to state whether the broker-dealer operator, or any of its 
affiliates, operates one or more NMS Stock ATSs other than the NMS 
Stock ATS named on the Form ATS-N, and, if so, to (1) identify the NMS 
Stock ATS(s) and provide its MPID(s); and (2) describe any interaction 
or coordination between the NMS Stock ATS(s) identified and the NMS 
Stock ATS named on the Form ATS-N including: (i) The circumstances 
under which subscriber orders or other trading interest received by the 
broker-dealer operator or any of its affiliates to be sent to the NMS 
Stock ATS named in the Form ATS-N may be sent to any identified NMS 
Stock ATS(s); (ii) circumstances under which subscriber orders or other 
trading interest to be sent to the NMS Stock ATS named on the Form ATS-
N are displayed or otherwise made known in any other identified NMS 
Stock ATS(s); and (iii) the circumstances under which a subscriber 
order received by the NMS Stock ATS named on the Form ATS-N may be 
removed and sent to any other identified NMS Stock ATS(s). Broker-
dealer operators of multiple NMS Stock ATSs would already be aware of 
how their NMS Stock ATSs may interact with one another and those of its 
affiliates by, for example, sharing order flow between each other.\606\ 
Further, as noted above, affiliates under this proposed disclosure 
requirement would be control affiliates that are either controlled by 
the broker-dealer operator or under common control with another entity. 
Consequently, the NMS Stock ATS should already be aware through its 
control or common control of whether its affiliates operate another NMS 
Stock ATS.
---------------------------------------------------------------------------

    \606\ To the extent the broker-dealer operator or its affiliates 
operate multiple NMS Stock ATSs but there is no possibility of 
interaction between such NMS Stock ATSs, proposed Form ATS-N would 
only require that this fact be noted in Part III, Item 2(b).
---------------------------------------------------------------------------

    Based on the currently filed Forms ATS reviewed by the Commission 
during the third quarter of 2015, the Commission estimates that there 
are 6 broker-dealer operators that operate, by themselves or through an 
affiliate, multiple ATSs that trade NMS stocks. The Commission notes 
that broker-dealer operators operating multiple NMS Stock ATSs, by 
themselves or with their affiliates, would be required to complete Part 
III, Item 2 of proposed Form ATS-N for each NMS Stock ATS. The 
Commission preliminarily believes that it would not be a significant 
burden for a broker-dealer operator to identify all of the NMS Stock 
ATSs operated by

[[Page 81096]]

either itself or its affiliates because, among other reasons, FINRA 
maintains an updated list of ATSs that trade equity securities on its 
public Web site.\607\ Furthermore, the disclosure requirement in Part 
III, Item 2(b) to describe the interaction of the various NMS Stock 
ATSs should generally be the same for each NMS Stock ATS, reducing the 
overall hour burden for completing multiple Forms ATS-N.\608\ The 
Commission also notes that the disclosure requirement in Part III, Item 
2 would not impose any significant burden on broker-dealer operators 
that, by themselves or with their affiliates, do not operate multiple 
NMS Stock ATSs. For broker-dealer operators operating multiple NMS 
Stock ATSs, by themselves or with their affiliates, the Commission 
preliminarily estimates that, on average, preparing Part III, Item 2 
for a Form ATS-N would add 4 hours to the current baseline for an 
initial operation report on current Form ATS. This would result in an 
aggregate initial hourly burden on such broker-dealer operators of 24 
hours above the current baseline.\609\
---------------------------------------------------------------------------

    \607\ See FINRA Equity ATS Firm List, https://www.finra.org/file/finra-equity-ats-firms-list.
    \608\ In other words, a broker-dealer operator that operates NMS 
Stock ATSs ``A'' and ``B'' would likely be able to use the 
disclosure in A's Form ATS-N for Part III, Item 2 for B as well.
    \609\ As noted above, the Commission estimates that there are 
currently approximately 6 broker-dealer operators that operate, by 
themselves or through an affiliate, multiple ATSs that trade NMS 
stocks. As such the increased burden would be calculated as follows: 
6 operators of multiple NMS Stock ATSs x (Attorney at 2 hours + 
Senior Systems Analyst 2 hours) = 24 burden hours.
---------------------------------------------------------------------------

    Part III, Item 3 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether or not the broker-dealer operator or any of its 
affiliates offer subscribers of the NMS Stock ATS any products or 
services used in connection with trading on the NMS Stock ATS (e.g., 
algorithmic trading products, market data feeds). If so, the NMS Stock 
ATS would be required to describe the products and services and 
identify the types of subscribers (e.g., retail, institutional, 
professional) to which such services or products are offered, and if 
the terms and conditions of the services or products are not the same 
for all subscribers, describe any differences. These products and 
services may vary widely across NMS Stock ATSs, some of which may offer 
no additional products or services in connection with access to the NMS 
Stock ATS and others that may offer a wide array of other products or 
services such as trading algorithms, order management systems, or 
market data services. Because the broker-dealer operator controls all 
aspects of the NMS Stock ATS, it should already be aware of all the 
products and services that it or its affiliates provide to subscribers 
in connection with subscribers' access to the ATS. Accordingly, the 
Commission preliminarily believes that listing and describing these 
products and services in Part III, Item 3 would not impose a 
substantial burden on respondents. In addition, Part III, Item 3 would 
also require the NMS Stock ATS to describe which products and services 
are offered to which type of subscriber and any differences in the 
terms or conditions of the services or products among subscribers. 
Depending on the extent to which the terms and conditions of the 
services or products vary among subscribers, the hourly burden related 
to completing Part III, Item 3 would likely vary. The Commission 
preliminarily estimates that, on average, preparing Part III, Item 3 
for a Form ATS-N would add 3 hours to the current baseline for an 
initial operation report on current Form ATS. This would result in an 
aggregate initial burden of 138 hours above the current baseline for 
all NMS Stock ATSs to complete Part III, Item 3 of proposed Form ATS-
N.\610\
---------------------------------------------------------------------------

    \610\ (Compliance Manager at 2 hours + Senior Marketing Manager 
at 1 hour) x 46 NMS Stock ATSs = 138 burden hours.
---------------------------------------------------------------------------

    Part III, Item 4 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether or not the broker-dealer operator or any of its 
affiliates have any formal or informal arrangement with an unaffiliated 
person(s), or affiliate(s) of such person, that operates a trading 
center regarding access to the NMS Stock ATS, including preferential 
routing arrangements, and, if so, to identify the person(s) and the 
trading center(s) and describe the terms of the arrangement(s). The 
Commission understands from discussions with ATSs that some ATSs that 
currently trade NMS stock have arrangements with other ATSs to provide 
mutual access to the each other's respective ATSs. The Commission 
recognizes that an NMS Stock ATS could also have arrangements with 
other trading centers such as a non-ATS trading center or a national 
securities exchange. In addition, there may be NMS Stock ATSs that have 
no arrangements with any other trading center. As the broker-dealer 
operator controls all aspects of the operation of the NMS Stock ATS, 
the broker-dealer operator should already be aware of any such 
arrangements providing for mutual access or preferential routing that 
it has with other trading centers. Accordingly, the Commission 
preliminarily estimates that, on average, preparing Part III, Item 4 
for a Form ATS-N would add 4 hours to the current baseline for an 
initial operation report on current Form ATS. This would result in an 
aggregate initial burden of 184 hours above the current baseline for 
all NMS Stock ATSs to complete Part III, Item 4 of proposed Form ATS-
N.\611\
---------------------------------------------------------------------------

    \611\ (Attorney at 2 hours + Compliance Manager at 2 hours) x 46 
NMS Stock ATSs = 184 burden hours.
---------------------------------------------------------------------------

    Part III, Item 5 of proposed Form ATS-N would require certain 
disclosures related to the trading activity of the broker-dealer 
operator or its affiliates on the NMS Stock ATS. Specifically, Part 
III, Item 5 would require the NMS Stock ATS to disclose whether or not 
the broker-dealer operator or any of its affiliates enters orders or 
other trading interest on the NMS Stock ATS, and, if so, to provide 
detailed disclosures describing such trading activity.\612\ As the 
broker-dealer operator controls all aspects of the operation of the NMS 
Stock ATS, the broker-dealer operator should already know all of the 
subscribers to the NMS Stock ATS, including any affiliates that trade 
on the ATS, whether the broker-dealer operator itself trades on the NMS 
Stock ATS, and how the broker-dealer operator or its affiliates trade 
on the NMS Stock ATS.\613\ The Commission preliminarily believes that 
this knowledge should allow NMS Stock ATSs to readily identify and list 
all affiliates that trade on the NMS Stock ATS pursuant to Part III, 
Item 5(a) without a significant burden. The broker-dealer operator may 
have to inquire as to the capacity in which each of its affiliates 
trade, the means by

[[Page 81097]]

which they enter orders or other trading interest to the ATS, and any 
means by which a subscriber can be excluded from interacting with the 
orders or other trading interest of the broker-dealer operator or its 
affiliates pursuant to Items 5(b), (c), and (d). However, as previously 
noted, because the disclosure requirements with respect to affiliates 
would only apply to control affiliates, which would either be 
controlled by the broker-dealer operator or under common control with 
the broker-dealer operator, the broker-dealer operator may already have 
this information or would likely be able to obtain the information 
required under Items 5(b) and (c) without a significant burden. 
Accordingly, the Commission preliminarily estimates that, on average, 
preparing Part III, Item 5 for a Form ATS-N would add 5 hours to the 
current baseline for an initial operation report on current Form ATS. 
This would result in an aggregate initial burden of 230 hours above the 
current baseline for all NMS Stock ATSs to complete Part III, Item 5 of 
proposed Form ATS-N.\614\
---------------------------------------------------------------------------

    \612\ Specifically, the NMS Stock ATS would be required to: (a) 
Identify each affiliate and business unit of the broker-dealer 
operator that may enter orders or other trading interest on the NMS 
Stock ATS; (b) describe the circumstances and capacity in which each 
identified affiliate and business unit enters orders or trading 
interest on the NMS Stock ATS (e.g., proprietary or agency); (c) 
describe the means by which each identified affiliate and business 
unit enters orders or other trading interest on the NMS Stock ATS 
(e.g., directly through a FIX connection to the NMS Stock ATS, or 
indirectly, by way of the broker-dealer operator's SOR (or similar 
functionality), algorithm, intermediate application, or sales desk); 
and (d) describe any means by which a subscriber can be excluded 
from interacting or trading with orders or other trading interest of 
the broker-dealer operator or its affiliates on the NMS Stock ATS.
    \613\ There may be some NMS Stock ATSs for which neither the 
broker-dealer operator nor its affiliates trade on the NMS Stock ATS 
at all, and thus, for which the disclosures required under Part III, 
Item 5 would impose no significant burden. However, based on the 
review of Forms ATS by the Commission and its staff and discussions 
with broker-dealer operators, the Commission understands that a 
majority of ATSs that trade NMS stocks currently either trade in 
their own ATSs, either by themselves or with or through their 
affiliates.
    \614\ (Attorney at 2 hours + Compliance Manager at 3 hours) x 46 
NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

    Part III, Item 6 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether the broker-dealer operator, or any of its 
affiliates, use a SOR(s) (or similar functionality), an algorithm(s), 
or both to send or receive subscriber orders or other trading interest 
to or from the NMS Stock ATS.\615\ The Commission and its staff 
understand from conversations with ATSs that nearly every ATS that 
trades NMS stocks currently uses some form of SOR (or similar 
functionality) or algorithm. The Commission recognizes that the SOR(s) 
(or similar functionality) of the broker-dealer operator or its 
affiliates and any algorithm(s) employed by the broker-dealer operator 
or its affiliates to enter orders onto the NMS Stock ATS may vary 
widely among ATSs with respect to the manner in which they operate, the 
information they send or receive, and how the SOR(s) (or similar 
functionality) and/or algorithm(s) may determine to route certain 
orders to the NMS Stock ATS as opposed to other venues. Accordingly, 
the Commission preliminarily believes that the burdens associated with 
the disclosures in Part III, Item 6 of proposed Form ATS-N are likely 
to vary depending on the complexity of the SOR(s) (or similar 
functionality) and/or algorithm(s), its significance to the operation 
of the NMS Stock ATS, and the functions and roles that it performs.
---------------------------------------------------------------------------

    \615\ Specifically, Part III, Item 6 of proposed Form ATS-N 
would require the NMS Stock ATS to: (a) Identify the SOR(s) (or 
similar functionality) or algorithm(s) and identify the person(s) 
that operates the SOR(s) (or similar functionality) or algorithm(s), 
if other than the broker-dealer operator; and (b) describe the 
interaction or coordination between the identified SOR(s) (or 
similar functionality) or algorithm(s), including any information or 
messages about orders or other trading interest (e.g., IOIs) that 
the SOR(s) (or similar functionality) or algorithm(s) send or 
receive to or from the NMS Stock ATS and the circumstances under 
which such information may be shared with any person.
---------------------------------------------------------------------------

    For example, in responding to Part III, Item 6(b), which would 
require an NMS Stock ATS to describe, among other things, any 
information or messages about orders or other trading interest that the 
SOR(s) (or similar functionality) and algorithm(s) send or receive to 
or from the NMS Stock ATS, an NMS Stock ATS that uses IOIs to 
facilitate trades on the NMS Stock ATS and that uses its SOR(s) (or 
similar functionality) and/or algorithm(s) to facilitate the sending of 
those IOIs to relevant persons would likely have a substantially 
greater burden in responding to Item 6(b) due to the number of messages 
that may be associated with an IOI and the subsequent responses to that 
IOI than an NMS Stock ATS that does not use IOIs. Accordingly, the 
Commission preliminarily estimates that, on average, preparing Part 
III, Item 6 for a Form ATS-N would add 10 hours to the current baseline 
for an initial operation report on current Form ATS. This would result 
in an aggregate initial burden of 460 hours above the current baseline 
for all NMS Stock ATSs to complete Part III, Item 6 of proposed Form 
ATS-N.\616\
---------------------------------------------------------------------------

    \616\ (Attorney at 4 hours + Compliance Manager at 3 hours + Sr. 
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 460 burden hours.
---------------------------------------------------------------------------

    Part III, Item 7 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether it has any shared employees,\617\ and identify 
the business unit(s) and/or the affiliate(s) of the broker-dealer 
operator to which the shared employee(s) provides services and identify 
the position(s) or title(s) that the shared employee(s) holds in the 
business unit(s) and/or affiliate(s) of the broker-dealer operator; and 
(2) describe the roles and responsibilities of the shared employee(s) 
at the NMS Stock ATS and the business unit(s) and/or affiliate(s) of 
the broker-dealer operator. As the broker-dealer operator controls all 
aspects of the NMS Stock ATS, it should already be aware of all of its 
employees and likely aware of any other roles or functions that such 
employees provide to other business units or affiliates of the broker-
dealer operator. The Commission therefore preliminarily believes that 
the NMS Stock ATS should be able to obtain this information readily. 
The extent of this disclosure burden would likely vary depending on the 
number of employees of the NMS Stock ATS and the extent to which such 
employees' roles are solely dedicated to operating the NMS Stock ATS 
versus also servicing other business unit(s) of the broker-dealer 
operator or its affiliates. Accordingly, the Commission preliminarily 
estimates that, on average, preparing Part III, Item 7 for a Form ATS-N 
would add 4 hours to the current baseline for an initial operation 
report on current Form ATS. This would result in an aggregate initial 
burden of 184 hours above the current baseline for all NMS Stock ATSs 
to complete Part III, Item 7 of proposed Form ATS-N.\618\
---------------------------------------------------------------------------

    \617\ See supra Section VII.B.8 describing who would be 
considered a shared employee of the broker-dealer operator.
    \618\ (Attorney at 2 hours + Compliance Manager at 2 hours) x 46 
NMS Stock ATSs = 184 burden hours.
---------------------------------------------------------------------------

    Part III, Item 8 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose whether any operation, service, or function of the NMS 
Stock ATS is performed by any person(s) other than the broker-dealer 
operator of the NMS Stock ATS, and if so to: (1) Identify the person(s) 
(in the case of a natural person, to identify only the person's 
position or title) performing the operation, service, or function and 
note whether this service provider(s) is an affiliate of the broker-
dealer, if applicable; (2) describe the operation, service, or function 
that the identified person(s) provides and describe the role and 
responsibilities of that person(s); and (3) state whether the 
identified person(s), or any of its affiliates, may enter orders or 
other trading interest on the NMS Stock ATS and, if so, describe the 
circumstances and means by which such orders or other trading interest 
are entered on the NMS Stock ATS. The Commission notes that this 
proposed disclosure requirement is similar to the Exhibit E disclosure 
requirement under the current Form ATS.\619\ The only additional 
disclosure requirement beyond that required currently by Exhibit E to 
Form ATS would be Item 8(c), which would require the NMS Stock ATS to 
state whether or not the service provider or the service provider's 
affiliate may transact on the NMS Stock ATS, and if so, the 
circumstances and means by which they may do so. The Commission 
preliminarily believes based on its

[[Page 81098]]

review of Form ATS Exhibit E disclosures that most, but not all, 
service providers to ATSs are not typically entities that would 
transact on the ATS by themselves. Based on Commission experience, 
affiliates of service providers to some ATSs that transact in NMS stock 
may subscribe to that ATS. An NMS Stock ATS may have to ask the service 
provider about the nature of the service provider's affiliates to 
ensure that such affiliates are not subscribers to the NMS Stock ATS or 
may otherwise be able to transact on the NMS Stock ATS to complete this 
disclosure. Accordingly, the Commission preliminarily estimates that, 
on average, preparing Part III, Item 8 for a Form ATS-N would add 3 
hours to the current baseline for an initial operation report on 
current Form ATS. This would result in an aggregate initial burden of 
138 hours above the baseline for all NMS Stock ATSs to complete Part 
III, Item 8 of proposed Form ATS-N.\620\
---------------------------------------------------------------------------

    \619\ Exhibit E of Form ATS requires an ATS to provide the name 
of any entity, other than the ATS, that is involved in the operation 
of the ATS, including the execution, trading, clearing, and settling 
of transactions on behalf of the ATS, and to provide a description 
of the role and responsibilities of each entity.
    \620\ (Attorney at 1 hour + Compliance Manager at 2 hours) x 46 
NMS Stock ATSs = 138 burden hours.
---------------------------------------------------------------------------

    Part III, Item 9 of proposed Form ATS-N would require an NMS Stock 
ATS to identify and describe any service, functionality, or procedure 
of the NMS Stock ATS available to the broker-dealer operator or its 
affiliates that is not available or does not apply to a subscriber(s) 
to the NMS Stock ATS. The Commission is not currently aware of any NMS 
Stock ATS that provides services, functionalities, or procedures to 
itself or its affiliates and not to subscribers, although the 
Commission recognizes that an NMS Stock ATS could do so. To the extent 
that the services, functionalities, or procedures of the NMS Stock ATS 
provided to the broker-dealer operator or its affiliates on the NMS 
Stock ATS differ from those provided to non-affiliated subscribers, the 
NMS Stock ATS would have to describe all such differences in Item 9. 
Depending on the extent of such differences, the hourly burden for 
providing these disclosures would vary. Conversely, if there are no 
differences between the services, functionalities, or procedures of the 
NMS Stock ATS that are provided to the broker-dealer operator or its 
affiliates relative to subscribers, Part III, Item 9 would only require 
the NMS Stock ATS to note this fact. Accordingly, the Commission 
preliminarily estimates that, on average, preparing Part III, Item 9 
for a Form ATS-N would add 2 hours to the current baseline for an 
initial operation report on current Form ATS. This would result in an 
aggregate initial burden of 92 hours above the current baseline for all 
NMS Stock ATSs to complete Part III, Item 9 of proposed Form ATS-
N.\621\
---------------------------------------------------------------------------

    \621\ (Attorney at 1.5 hours + Compliance Manager at 0.5 hour) x 
46 NMS Stock ATSs = 92 burden hours.
---------------------------------------------------------------------------

    Part III, Item 10 of proposed Form ATS-N would require certain 
disclosures related to the NMS Stock ATS's written safeguards and 
written procedures to protect the confidential trading information of 
subscribers pursuant to Rule 301(b)(10) of Regulation ATS.\622\ As 
previously discussed, NMS Stock ATSs would be required under the 
proposed amendments to Regulation ATS to write their policies and 
procedures under Rule 301(b)(10) of Regulation ATS. Part III, Item 10 
of proposed Form ATS-N would require a description of these policies 
and procedures. Because NMS Stock ATSs would have already incurred an 
hourly burden in connection with writing its policies and procedures 
pursuant to Rule 301(b)(10) of Regulation ATS, the Commission 
preliminarily believes that Item 10 would impose only a minimal burden 
on NMS Stock ATSs to describe such written policies and procedures. 
Part III, Item 10(b) of proposed Form ATS-N would also require an NMS 
Stock ATS to identify the positions or titles of any persons that can 
access the confidential trading information of subscribers, a 
description of what information such persons can access, and the 
circumstances under which such persons can access the confidential 
trading information. The Commission preliminarily believes that NMS 
Stock ATSs should, pursuant to their existing obligations under Rule 
301(b)(10), be aware of all persons that can access the confidential 
trading information of subscribers, the circumstances under which such 
persons can access that information, and what information they can 
access. As NMS Stock ATSs should already have this knowledge, the 
Commission preliminarily believes that the proposed disclosures of Item 
10(b) would not be overly burdensome for an NMS Stock ATS to complete. 
Accordingly, the Commission preliminarily estimates that, on average, 
preparing Part III, Item 10 for a proposed Form ATS-N would add 2 hours 
above the current baseline for an initial operation report on current 
Form ATS. This would result in an aggregate initial burden of 92 hours 
above the current baseline for all NMS Stock ATSs to complete Item 10 
of Part III of proposed Form ATS-N.\623\
---------------------------------------------------------------------------

    \622\ Specifically, an NMS Stock ATS would be required to: (1) 
Describe the means by which a subscriber may consent or withdraw 
consent to the disclosure of confidential trading information to any 
persons (including the broker-dealer operator and any of its 
affiliates); (2) identify the positions or titles of any persons 
that have access to confidential trading information, describe the 
confidential trading information to which the persons have access, 
and describe the circumstances under which the persons can access 
confidential trading information; (3) describe the written standards 
controlling employees of the NMS Stock ATS that trade for employees' 
accounts; and (4) describe the written oversight procedures to 
ensure that the safeguards and procedures are implemented and 
followed.
    \623\ (Attorney at 1 hour + Compliance Manager at 1 hour) x 46 
NMS Stock ATSs = 92 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 1 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose, among other things, information regarding: (1) Any 
eligibility requirements to access the NMS Stock ATS; (2) the terms and 
conditions of any contractual agreements for granting access to the NMS 
Stock ATS for the purpose of effecting transactions in securities or 
for submitting, disseminating, or displaying orders on the NMS Stock 
ATS; (3) the types of subscribers and other persons that use the 
services of the NMS Stock ATS; (4) any formal or informal arrangement 
the NMS Stock ATS has with liquidity providers; and (5) any 
circumstances by which access to the NMS Stock ATS can be limited or 
denied and the procedures or standards that are used to determine such 
action. For each disclosure, the NMS Stock ATS would also be required 
to explain whether there are any differences in how these requirements, 
terms, conditions, criteria, procedures, and/or standards are applied 
among subscribers and persons.
    The Commission notes that the proposed disclosure requirements of 
Part IV, Item 1 of proposed Form ATS-N are, in large part, already 
required under current Form ATS. Exhibit A of current Form ATS requires 
an ATS to describe its classes of subscribers (e.g., broker-dealer, 
institutional, or retail) and any differences in access to services 
offered by the ATS to different groups or classes of subscribers. Part 
IV, Item 1 of proposed Form ATS-N requires the disclosure of similar 
information to Exhibit A, but Part IV, Item 1 would expressly require 
significantly more detail, and a greater number of disclosures, than 
Exhibit A of current Form ATS including with respect to the terms and 
conditions of use and eligibility to become a subscriber. The 
Commission notes that ATSs currently vary in the depth of their 
discussion of subscribers in Exhibit A of their Forms ATS, with some 
providing a fulsome description that would likely include

[[Page 81099]]

most of the express disclosures proposed under Part IV, Item 1 of 
proposed Form ATS-N, while other ATSs might not, for example, provide 
details surrounding differing eligibility requirements among 
subscribers.
    Depending on the complexity of the NMS Stock ATS, the different 
types of subscribers, and, most significantly, the extent to which the 
terms and conditions vary among subscribers, the disclosure burden 
related to Part IV, Item I of proposed Form ATS-N would likely vary. 
For example, an NMS Stock ATS with two classes of subscribers with 
identical terms and conditions of use, eligibility criteria, and the 
same circumstances and process regarding limiting and denying services 
of the NMS Stock ATS would likely have less of a burden than an NMS 
Stock ATS with five groups of subscribers with varying terms and 
conditions of use, eligibility criteria, and differing circumstances 
and processes for which they may be limited or denied the services of 
the NMS Stock ATS. Accordingly, the Commission preliminary estimates 
that, on average, preparing Part IV, Item 1 of a Form ATS-N would add 6 
hours to the current baseline for an initial operation report on 
current Form ATS to respond to the more detailed questions regarding 
subscribers to the NMS Stock ATS. This would result in an aggregate 
initial burden of 276 hours above the current baseline for all NMS 
Stock ATSs to complete Part IV, Item 1 of proposed Form ATS-N.\624\
---------------------------------------------------------------------------

    \624\ (Attorney at 4 hours + Compliance Manager at 2 hours) x 46 
NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 2 of proposed Form ATS-N would require an NMS Stock 
ATS to provide the days and hours of operation of the NMS Stock ATS, 
including the times when orders or other trading interest are entered 
on to the NMS Stock ATS and the time when pre-opening or after-hours 
trading may occur. It would also require the NMS Stock ATS to explain 
differences, if any, among subscribers and persons in the times when 
orders or other trading interest are entered on the NMS Stock ATS. 
Current Form ATS does not specify similar disclosures, so the 
Commission preliminarily estimates that respondents would incur 
additional burdens above the current baseline when preparing the 
disclosures required under Part IV, Item 2 of proposed Form ATS-N. The 
NMS Stock ATS should already be aware of the hours during which it 
operates and whether and when it permits pre-opening or after-hours 
trading. Based on the experience of the Commission and its staff 
reviewing Form ATS and ATS-R filings, the Commission preliminarily 
believes that most ATSs that currently trade NMS stocks do not provide 
for after-hours or pre-opening trading of NMS stock. For NMS Stock ATSs 
for which the times when orders or other trading interest may be sent 
to the NMS Stock ATS are not the same for all subscribers and persons, 
the disclosure burden related to Part IV, Item 2 would likely increase. 
Accordingly, the Commission preliminarily estimates that, on average, 
preparing Part IV, Item 2 for a Form ATS-N would add 0.5 hours to the 
current baseline for an initial operation report on current Form ATS. 
This would result in an aggregate initial burden of 23 hours above the 
current baseline for all NMS Stock ATSs to complete Part IV, Item 2 of 
proposed Form ATS-N.\625\
---------------------------------------------------------------------------

    \625\ Compliance Manager at 0.5 hours x 46 NMS Stock ATSs = 23 
burden hours.
---------------------------------------------------------------------------

    Part IV, Item 3 of proposed Form ATS would require an NMS Stock ATS 
to provide a detailed disclosure of the order types available on the 
NMS Stock ATS. Part IV Item 3(a) would require an NMS Stock ATS to 
describe any types of orders that are entered to the NMS Stock ATS, 
their characteristics, operations, and how they are handled on the NMS 
Stock ATS.\626\ Part IV, Item 3(b) would require the NMS Stock ATS to 
describe any differences if the availability of its order types, and 
their terms and conditions, are not the same for all subscribers and 
persons. Part IV, Item 3(c) would require an NMS Stock ATS to describe 
any requirements and handling procedures for minimum order sizes, odd-
lot orders, and mixed-lot orders and to describe any differences if the 
requirements and handling procedures for minimum order sizes, odd-lot, 
or mixed-lot orders are not the same for all subscribers and persons. 
Part IV, Item 3(d) would require an NMS Stock ATS to describe any 
messages sent to or received by the NMS Stock ATS indicating trading 
interest (e.g., IOIs, actionable IOIs or conditional orders), including 
the information contained in the message, the means under which 
messages are transmitted, the circumstances in which messages are 
transmitted (e.g., automatically by the NMS Stock ATS, or upon the 
subscriber's request), and the circumstances in which they may result 
in an execution on the NMS Stock ATS; the NMS Stock ATS would also be 
required to describe any differences among subscribers and persons if 
the terms and conditions regarding these messages, IOIs, and 
conditional orders are not the same for all subscribers and persons.
---------------------------------------------------------------------------

    \626\ This would include: (i) Priority for each order type; (ii) 
conditions for each order type; (iii) order types designed not to 
remove liquidity (e.g., post-only orders); (iv) order types that 
adjust their price as changes to the order book occur (e.g., price 
sliding orders or pegged orders) or have a discretionary range; (v) 
the time-in-force instructions that can be used or not used with 
each order type; (vi) the availability of order types across all 
forms of connectivity to the NMS Stock ATS and differences, if any, 
between the availability of an order type across these forms of 
connectivity; (vii) whether an order type is eligible for routing to 
other trading centers; and (viii) the circumstances under which 
order types may be combined with a time-in-force or another order 
type, modified, replaced, canceled, rejected, or removed from the 
NMS Stock ATS.
---------------------------------------------------------------------------

    The Commission notes that some of the proposed disclosure 
requirements of Part IV, Item 3 of proposed Form ATS-N are already 
required under current Form ATS. Exhibit F of current Form ATS requires 
an ATS to describe, among other things, the manner of operation and the 
procedures governing order entry and execution of the ATS. Part IV, 
Item 3 of proposed Form ATS-N would require significantly more detail, 
and a greater number of disclosures, in regard to types of orders than 
Exhibit F of current Form ATS. ATSs that trade NMS stocks currently 
vary in the extent of their disclosures relating to order types as 
provided in Exhibit F. Some provide a relatively fulsome discussion of 
different order types and to whom they are made available, while other 
ATSs that trade NMS stocks do not provide substantial detail in this 
area. Depending on the extent to which an ATS that trades NMS stocks 
already discloses most of the information regarding order types and 
trading interest on Exhibit F of its Form ATS, as well as the variety 
and complexity of different order types available, the proposed 
disclosure burden of Part IV, Item 3 of proposed Form ATS-N will likely 
vary among NMS Stock ATSs. For example, those NMS Stock ATSs that send 
and receive actionable IOIs and/or conditional orders would be required 
to draft a detailed explanation regarding those order types for Part 
IV, Item 3(d), whereas NMS Stock ATSs without such order types would 
simply state that they do not send and receive IOIs and conditional 
orders. Accordingly, the Commission preliminarily estimates that, on 
average, preparing Part IV, Item 3 of a Form ATS-N would add 6 hours to 
the current baseline for an initial operation report on current Form 
ATS, depending on such factors as described above. This would result in 
an aggregate initial burden of 276 hours above the current baseline for 
an initial operation report on current Form ATS for all NMS

[[Page 81100]]

Stock ATSs to complete Part IV, Item 3 of proposed Form ATS-N.\627\
---------------------------------------------------------------------------

    \627\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. 
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 4 of proposed Form ATS-N would require an NMS Stock 
ATS to disclose the means by which subscribers or other persons connect 
and send orders to the NMS Stock ATS. Part IV, Item 4(a) would require 
the NMS Stock ATS to describe the means by which subscribers or other 
persons connect to the NMS Stock ATS and enter orders or other trading 
interest on the NMS Stock ATS (e.g., via a direct FIX connection to the 
ATS or an indirect connection via the broker-dealer operator's SOR, any 
intermediate functionality, algorithm, or sales desk). This item would 
also require the NMS Stock ATS to describe any differences if the terms 
and conditions for connecting and entering orders or other trading 
interest are not the same for all subscribers and persons. Part IV, 
Item 4(b) would require the NMS Stock ATS to describe any co-location 
services or any other means by which any subscriber or other persons 
may enhance the speed by which to send or receive orders, trading 
interest, or messages to or from the NMS Stock ATS, the terms and 
conditions of such co-location services, and to describe any 
differences if the terms and conditions of the co-location services are 
not the same for all subscribers and persons.
    The Commission notes that some of the proposed disclosure 
requirements of Part IV, Item 4 of proposed Form ATS-N are already 
required under current Form ATS. Exhibit F of current Form ATS requires 
an ATS to describe, among other things, the means of access to the ATS. 
Part IV, Item 4 of proposed Form ATS-N would expressly require 
significantly more detail, and a greater number of disclosures, in 
regard to order entry, connectivity, and co-location services than 
Exhibit F of current Form ATS. ATSs that currently trade NMS stocks 
vary in the depth of their disclosures related to order entry. 
Currently, most ATSs that trade NMS stocks do not provide much or any 
detail regarding the extent to which they provide co-location services 
or other speed advantages to subscribers or persons trading on the ATS. 
Accordingly, the Commission preliminarily estimates that respondents 
would incur an additional burden above the current baseline when 
preparing the disclosures required under Part IV, Item 4 of proposed 
Form ATS-N. The Commission preliminarily estimates that, on average, 
preparing Part IV, Item 4 for a Form ATS-N would add 5 hours to the 
current baseline for an initial operation report on current Form ATS to 
provide a more detailed description of the connection and order entry 
procedures, a description of any co-location or speed-advantage 
services, as well as any differences among subscribers and other 
persons with respect to these disclosures. This would result in an 
aggregate initial burden of 230 hours above the current baseline for 
all NMS Stock ATSs to complete Item 4 of Part IV of proposed Form ATS-
N.\628\
---------------------------------------------------------------------------

    \628\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. 
Systems Analyst at 2 hours) x 46 NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 5 of proposed Form ATS-N would require an NMS Stock 
ATS to explain if and how it segments order flow, the type of notice 
about such segmentation that it provides to subscribers, and whether 
subscribers, the broker-dealer operator, or its affiliates may submit 
order preferencing instructions. Part IV, Item 5(a) would require an 
NMS Stock ATS to describe any segmentation of orders or other trading 
interest on the NMS Stock ATS (e.g., classification by type of 
participant, source, nature of trading activity), and to describe the 
segmentation categories, the criteria used to segment these categories, 
and procedures for determining, evaluating, and changing segmented 
categories. This item would require an NMS Stock ATS to describe any 
differences if the segmented categories, the criteria used to segment 
these categories, and any procedures for determining, evaluating, or 
changing segmented categories are not the same for all subscriber and 
persons. Part IV, Item 5(b) would require the NMS Stock ATS to state 
whether it notifies subscribers or persons about the segmentation 
category that a subscriber or a person is assigned and to describe any 
notice provided to subscribers or persons about the segmented category 
that they are assigned and the segmentation identified in Item 5(a), 
including the content of any notice and the means by which any notice 
is communicated. If the notice is not the same for all subscribers and 
persons, the NMS Stock ATS would be required to describe any 
differences. Part IV, Item 5(c) would require an NMS Stock ATS to 
describe any means and the circumstances by which a subscriber, the 
broker-dealer operator, or any of its affiliates may designate an order 
or trading interest submitted to the NMS Stock ATS to interact or not 
to interact with specific orders, trading interest, or persons on the 
NMS Stock ATS (e.g., designating an order or trading interest to be 
executed against a specific subscriber) and how such designations 
affect order priority and interaction.
    The Commission notes that some of the proposed disclosure 
requirements of Part IV, Item 5 of proposed Form ATS-N are already 
required under current Form ATS. Exhibit F of current Form ATS requires 
an ATS to describe, among other things, the manner of operation and the 
procedures governing order entry and execution of the ATS. However, 
Exhibit F of current Form ATS does not expressly enumerate the level of 
detail that an ATS must provide in regard to its segmentation of order 
flow and does not expressly ask for an ATS to describe any notice to 
subscribers regarding segmentation or explain any means and 
circumstances for order preferencing, whereas Part IV, Item 5 of 
proposed Form ATS-N would require detailed disclosures in regard to 
these subjects.\629\ Based on its review of Exhibit F disclosures, the 
Commission understands that most, but not all, ATSs that currently 
trade NMS stocks segment orders in some manner and that many NMS Stock 
ATSs allow subscribers to enter some order preferencing criteria or 
limits. These ATSs vary in the depth of their description as to how 
they segment order flow and order preferencing. For instance, most ATSs 
that currently trade NMS stocks do not expressly provide the Commission 
with a description of the means by which persons might be notified 
about segmentation, as would be required by Part IV, Item 5(b) of 
proposed Form ATS-N. Accordingly, the Commission preliminarily 
estimates that respondents would incur an additional burden above the 
current baseline when preparing the disclosures required under Part IV, 
Item 5 of proposed Form ATS-N. The Commission preliminarily estimates 
that, on average, preparing Part IV, Item 5 for a Form ATS-N would add 
7 hours to the current baseline for an initial operation report on 
current Form ATS to provide a detailed description of how, if at all, 
the NMS Stock ATS segments order flow, provides any notice to those 
trading on the NMS Stock ATS regarding segmentation, and allows order 
preferencing. This would result in an aggregate initial burden of 322 
hours above the current baseline for

[[Page 81101]]

all NMS Stock ATSs to complete Part IV, Item 5 of proposed Form ATS-
N.\630\
---------------------------------------------------------------------------

    \629\ Though Exhibit F of current Form ATS, unlike Item 5(b) of 
Part IV of proposed Form ATS-N, does not expressly require ATSs to 
describe the content of any notice to subscribers regarding 
segmentation, Exhibit F does require a copy of any materials 
currently provided to subscribers, which could include such a 
notice.
    \630\ (Attorney at 2 hours + Compliance Manager at 2.5 hours + 
Sr. Systems Analyst at 2.5 hours) x 46 NMS Stock ATSs = 322 burden 
hours.
---------------------------------------------------------------------------

    Part IV, Item 6(a) of proposed Form ATS-N would require an NMS 
Stock ATS to describe any means and circumstances by which orders or 
other trading interest on the NMS Stock ATS are displayed or made known 
outside the NMS Stock ATS and the information about the orders and 
trading interest that are displayed. If the display of orders or other 
trading interest is not the same for all subscribers and persons, the 
NMS Stock ATS would be required to describe any differences. Part IV, 
Item 6(b) of proposed Form ATS-N would require the NMS Stock ATS to 
identify the subscriber(s) or person(s) (in the case of a natural 
person, the NMS Stock ATS would only identify the person's position or 
title) to whom the orders and trading interest are displayed or 
otherwise made known. Although Exhibit F of current Form ATS requires 
an ATS to describe, among other things, the manner of operation and the 
procedures governing order entry and execution of the ATS, Exhibit F 
does not expressly state that an ATS must explain if and how order 
information is displayed or otherwise made known outside the NMS Stock 
ATS. The Commission understands from its review of Forms ATS filings 
that a majority of ATSs that trade NMS stocks provide some form of IOI 
or conditional order that would likely need to be described in Part IV, 
Item 6 of proposed Form ATS-N.\631\ Depending on the variety of trading 
interest that shares some trading information outside of the NMS Stock 
ATS and the complexity of such information sharing, the disclosure 
burden in responding to Part IV, Item 6 would likely vary among NMS 
Stock ATSs. The Commission also notes that there is currently one ATS 
that trades NMS stocks that operates as an ECN. This ATS would have to 
describe in Part IV, Item 6 how it displays orders and other 
information about trading interest on the ATS. Accordingly, the 
Commission preliminarily estimates that, on average, preparing Part IV, 
Item for a Form ATS-N would add 5 hours to the current baseline for an 
initial operation report on current Form ATS, depending on such factors 
as described above. This would result in an aggregate initial burden of 
230 hours above the current baseline for all NMS Stock ATSs to complete 
Part IV, Item 6 of proposed Form ATS-N.\632\
---------------------------------------------------------------------------

    \631\ See supra Part IV, Item 6 of proposed Form ATS-N.
    \632\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. 
Systems Analyst at 2 hours) x 46 NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 7 of proposed Form ATS-N would require an NMS Stock 
ATS to describe its trading services in detail. Part IV, Items 7(a) and 
7(b) of proposed Form ATS-N would require an NMS Stock ATS to disclose 
the means or facilities used by the NMS Stock ATS to bring together the 
orders of multiple buyers and sellers, as well as the established, non-
discretionary methods that dictate the terms of trading among multiple 
buyers and sellers on the facilities of the NMS Stock ATS, including 
rules and procedures governing the priority, pricing methodologies, 
allocation, matching, and execution of orders and other trading 
interest. Part IV, Item 7(c) would require the NMS Stock ATS to 
describe any trading procedures related to price protection mechanisms, 
short sales, locked-crossed markets, the handling of execution errors, 
time-stamping of orders and executions, or price improvement 
functionality. For all disclosures required under Item 7, the NMS Stock 
ATS would also be required to describe any differences in the 
availability of a functionality regarding its trading services among 
subscribers and persons.
    The Commission notes that some of the proposed disclosure 
requirements of Part IV, Item 7 of proposed Form ATS-N are already 
required under current Form ATS. Exhibit F of current Form ATS requires 
an ATS to describe, among other things, the manner of operation and the 
procedures governing order entry and execution of the ATS. These 
required disclosures in Exhibit F of Form ATS are similar to those set 
forth in Item 7 of proposed Form ATS-N, which would require disclosures 
relating to matching methodology, order interaction rules, and 
execution procedures of the NMS Stock ATS. Consequently, the Commission 
preliminarily believes that NMS Stock ATSs already have some experience 
completing Exhibit F that would lessen the burden related to responding 
to the more detailed disclosures in Items 7(a), (b), and (c) of Part IV 
of proposed Form ATS-N.
    Furthermore, Part IV, Item 7 of proposed Form ATS-N would require 
an NMS Stock ATS to describe how the NMS Stock ATS meets the two prongs 
necessary to meet the Exchange Act's definition of ``exchange'' 
pursuant to Rule 3b-16(a) under the Exchange Act in Items 7(a) and 
(b).\633\ Based on reviews of Form ATS submissions, the Commission 
understands that ATSs that currently trade NMS stocks generally do not 
explicitly explain how their systems meet the requirements of each 
prong under Rule 3b-16, which are necessary in order to constitute an 
ATS. Those systems seeking to operate as NMS Stock ATSs would be 
required to draft those explanations, or modify existing descriptions 
of their current system as they may provide currently in Form ATS, to 
meet the disclosure requirements of Part IV, Item 7 of proposed Form 
ATS-N.
---------------------------------------------------------------------------

    \633\ See 17 CFR 240.3b-16 providing, among other things, that 
an entity must (1) bring together the orders for securities of 
multiple buyers and sellers; and (2) use 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).
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily estimates that 
respondents would incur an additional burden above the current baseline 
when preparing the disclosures required under Part IV, Item 7 of 
proposed Form ATS-N. The Commission preliminarily estimates that, on 
average, preparing Part IV, Item 7 for a Form ATS-N would add 6 hours 
to the current baseline for an initial operation report on current Form 
ATS to provide a description of the NMS Stock ATS's trading services. 
This would result in an aggregate initial burden of 276 hours above the 
current baseline for all NMS Stock ATSs to complete Part IV, Item 7 of 
proposed Form ATS-N.\634\
---------------------------------------------------------------------------

    \634\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. 
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 8 of proposed Form ATS-N would require an NMS Stock 
ATS to describe any procedures governing trading in the event the NMS 
Stock ATS suspends trading or experiences a system disruption or system 
malfunction. If the procedures governing trading during a suspension or 
system disruption or malfunction are not the same for all subscribers 
and persons, the NMS Stock ATS would be required to describe any 
differences.
    Exhibit G of Form ATS requires ATSs to describe the ATS's 
procedures for reviewing system capacity, security, and contingency 
planning procedures. The Commission preliminarily believes that the 
proposed disclosures in Part IV, Item 8 of proposed Form ATS-N relating 
to system disruptions, malfunctions, or other suspensions relate, in 
part, to the Exhibit G disclosures on current Form ATS. The Commission 
notes that some ATSs that trade NMS stocks currently provide

[[Page 81102]]

some disclosures relating to system disruptions, malfunctions, and 
other suspensions in their Exhibit F, Exhibit G, or in subscriber 
manuals (or other materials provided to subscribers) that are required 
to be provided to the Commission under Exhibit F of current Form ATS. 
Consequently, the Commission preliminarily believes that NMS Stock ATSs 
should be able to provide the proposed disclosures in Part IV, Item 8 
of proposed Form ATS-N without a significant burden over the current 
baseline as they should already be aware of how the ATS operates, 
handles system disruptions, malfunctions or other suspensions. The 
Commission recognizes, however, that Item Part IV, Item 8 is 
significantly more specific and detailed in its proposed disclosure 
requirements than current Form ATS.
    Accordingly, the Commission preliminarily estimates that 
respondents would incur an additional burden above the current baseline 
when preparing the disclosures required under Part IV, Item 8 of 
proposed Form ATS-N. The Commission preliminarily estimates that, on 
average, preparing Part IV, Item 8 for a Form ATS-N would add 2.5 hours 
to the current baseline for an initial operation report on current Form 
ATS to provide a detailed description of the NMS Stock ATS's procedures 
for system disruptions, malfunctions, or other suspensions. This would 
result in an aggregate initial burden of 115 hours above the current 
baseline for all NMS Stock ATSs to complete Part IV, Item 8 of proposed 
Form ATS-N.\635\
---------------------------------------------------------------------------

    \635\ (Attorney at 1 hour + Compliance Manager at .5 hours + Sr. 
Systems Analyst at 1 hour) x 46 NMS Stock ATSs = 115 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 9 of proposed Form ATS-N would require an NMS Stock 
ATS to describe any opening, reopening and closing processes, and any 
procedures for after-hours trading. Part IV, Item 9(a) of proposed Form 
ATS-N would require an NMS Stock ATS to describe any opening and 
reopening processes, including how orders or other trading interest are 
matched and executed prior to the start of regular trading hours or 
following a stoppage of trading in a security during regular trading 
hours and how unexecuted orders or other trading interest are handled 
at the time the NMS Stock ATS begins regular trading at the start of 
regular trading hours or following a stoppage of trading in a security 
during regular trading hours. The NMS Stock ATS would also be required 
to describe any differences between pre-opening executions, executions 
following a stoppage of trading in a security during regular trading 
hours, and executions during regular trading hours. Part IV, Items 9(b) 
and (c) would require an NMS Stock ATS to describe any closing process 
and after-hours trading procedures, respectively, the manner in which 
unexecuted orders or other trading interest are handled at the close of 
regular trading, and how orders and trading interest are matched and 
executed during after-hours trading. The NMS Stock ATS would also be 
required to describe any differences between the closing and after-
hours executions versus executions during regular trading hours.
    The Commission notes that some of the proposed disclosure 
requirements of Part IV, Item 9 of proposed Form ATS-N are incorporated 
by some ATSs that trade NMS stocks into Exhibit F of their current 
Forms ATS, which requires an ATS to describe, among other things, the 
manner of operation and the procedures governing order entry and 
execution of the ATS. Currently, ATSs that trade NMS stocks vary in the 
depth of their disclosures relating to opening, reopening, or closing 
processes, and after-hours trading procedures. The Commission notes 
that these opening, reopening, or closing processes, and after-hours 
trading procedures, may vary widely across different NMS Stock ATSs, 
with some, for example, allowing for pre-opening executions and routing 
and after-hours trading and routing, while others may not have an 
opening process and simply commence with regular trading without any 
option for after-hours trading. In any case, NMS Stock ATSs should 
already be aware of any opening, reopening or closing processes, and 
after-hours trading procedures, they may have as well as any 
differences in trading and execution during the opening, reopening, or 
closing processes, and during after-hours trading. Accordingly, the 
Commission preliminarily believes that preparing Part IV, Item 9 of 
proposed Form ATS-N for a Form ATS-N would not impose a significant 
additional burden above the current baseline for an initial operation 
report on current Form ATS. The Commission preliminarily estimates 
that, on average, preparing Part IV, Item 9 for a Form ATS-N would add 
3 hours to the current baseline for an initial operation report on 
current Form ATS to describe its opening, reopening, or closing 
processes, and after-hours trading procedures. This would result in an 
aggregate initial burden of 138 hours above the current baseline for 
all NMS Stock ATSs to complete Part IV, Item 9 of proposed Form ATS-
N.\636\
---------------------------------------------------------------------------

    \636\ (Compliance Manager at 2 hours + Sr. Systems Analyst at 1 
hour) x 46 NMS Stock ATSs = 138 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 10 of proposed Form ATS-N would require an NMS Stock 
ATS to describe its outbound routing functions. Part IV, Item 10(a) of 
proposed Form ATS-N would require an NMS Stock ATS to describe the 
circumstances under which orders or other trading interest are routed 
from the NMS Stock ATS to another trading center, including whether 
outbound routing occurs at the affirmative instruction of the 
subscriber or at the discretion of the broker-dealer operator, and the 
means by which routing is performed (e.g., a third party or order 
management system, or a SOR (or similar functionality) or algorithm of 
the broker-dealer operator or any of its affiliates). Part IV, Item 
10(b) of proposed Form ATS-N would require an NMS Stock ATS to describe 
any differences if the means by which orders or other trading interest 
are routed from the NMS Stock ATS are not the same for all subscribers 
and persons. Exhibit F of current Form ATS requires an ATS to describe, 
among other things, the manner of operation and the procedures 
governing order execution of the ATS, but it does not specifically 
state the level of detail an ATS must provide when describing its 
outbound routing procedures. Additionally, the Commission understands 
based on disclosures in Form ATS submissions, some ATSs that currently 
trade NMS stocks do not route orders out of the ATS. Consequently, the 
disclosure burden related to Part IV, Item 10 of proposed Form ATS-N 
would likely vary among NMS Stock ATSs depending on whether they route 
orders at all, the variety of circumstances under which they may route 
orders, and the variety of destinations or criteria to determine such 
destinations to which an order or other trading interest may route. 
Accordingly, the Commission preliminarily believes that the average 
additional burden above the baseline imposed by Part IV, Item 10 of 
proposed Form ATS-N may vary significantly among NMS Stock ATSs. 
Accordingly, the Commission preliminarily estimates that, on average, 
preparing Part IV, Item 10 for a Form ATS-N would add 6 hours to the 
current baseline for an initial operation report on current Form ATS, 
depending on such factors as described above. This would result in an 
aggregate initial burden of 276 hours above the current baseline for 
all NMS

[[Page 81103]]

Stock ATSs to complete Part IV, Item 10 of proposed Form ATS-N.\637\
---------------------------------------------------------------------------

    \637\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. 
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 11 of proposed Form ATS would require an NMS Stock 
ATS to describe its sources and uses of market data. Part IV, Item 
11(a) would require an NMS Stock ATS to describe the market data used 
by the NMS Stock ATS and the source of that market data (e.g., market 
data feeds disseminated by the SIP and market data feeds disseminated 
directly by an exchange or other trading center or third-party vendor 
of market data). Part IV, Item 11(b) would require the NMS Stock ATS to 
describe the specific purpose for which market data is used by the NMS 
Stock ATS, including how market data is used to determine the NBBO, 
protected quotes, pricing of orders and executions, and routing 
destinations. Form ATS does not specifically require an ATS to describe 
its sources of market data, though, this information is often important 
to understanding the execution of orders on an ATS. The Commission is 
aware based on Form ATS filings that many ATSs that trade NMS stocks 
provide descriptions related to their use of market data, including 
providing the name of their market data vendor. The Commission 
preliminarily believes that the proposed disclosures under Part IV, 
Item 11 would not impose any significant additional burden on NMS Stock 
ATSs, which should already be aware of the market data that they use 
and the manner in which they use it. Accordingly, the Commission 
preliminarily estimates that, on average, preparing Part IV, Item 11 
for a Form ATS-N would add 4 hours to the current baseline for an 
initial operation report on current Form ATS to describe the sources of 
market data and the manner in which the NMS Stock ATS uses market data. 
This would result in an aggregate initial burden of 184 hours above the 
current baseline for all NMS Stock ATSs to complete Part IV, Item 11 of 
proposed Form ATS-N.\638\
---------------------------------------------------------------------------

    \638\ (Compliance Manager at 2 hours + Sr. Systems Analyst at 2 
hours) x 46 NMS Stock ATSs = 184 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 12 of proposed Form ATS-N would require an NMS Stock 
ATS to make certain disclosures regarding its fees, rebates, and other 
charges. Part IV, Item 12(a) of proposed Form ATS-N would require an 
NMS Stock ATS to describe any fees, rebates, or other charges of the 
NMS Stock ATS (e.g., connectivity fees, subscription fees, execution 
fees, volume discounts) and provide the range (e.g., high and low) of 
such fees, rebates, or other charges. Part IV, Item 12(b) of proposed 
Form ATS-N would require the NMS Stock ATS to describe any differences 
if the fees, rebates, or other charges of the NMS Stock ATS are not the 
same for all subscribers and persons. Current Form ATS does not require 
an ATS to disclose and explain its fee structure, and based on 
Commission experience, few, if any, do so in their current Form ATS 
filings. The Commission recognizes that, like national securities 
exchanges, NMS Stock ATSs may adopt a variety of fee structures that 
may include rebates, incentives for subscribers to bring liquidity to 
the NMS Stock ATS, more traditional transaction-based fee structures, 
and other fees such as a monthly subscriber access fee. Depending on 
the complexity and variety of an NMS Stock ATS's fee structure and the 
extent to which these fees are not the same for all subscribers and 
persons, the proposed disclosure burden related to Part IV, Item 12 of 
proposed Form ATS-N will likely vary. Accordingly, the Commission 
preliminarily estimates that, on average, preparing Part IV, Item 12 
for a Form ATS-N would add 5 hours to the current baseline for an 
initial operation report on current Form ATS to describe the NMS Stock 
ATS's fee structure and any differences among subscribers and persons 
relating to fees, rebates, or other charges. This would result in an 
aggregate initial burden of 230 hours above the current baseline for 
all NMS Stock ATSs to complete Part IV, Item 12 of proposed Form ATS-
N.\639\
---------------------------------------------------------------------------

    \639\ (Attorney at 1 hour + Compliance Manager at 3 hours + Sr. 
Systems Analyst at 1 hour) x 46 NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 13 of proposed Form ATS would require an NMS Stock 
ATS to describe any arrangements or procedures for trade reporting, 
clearance, and settlement on the NMS Stock ATS. Part IV, Item 13(a) of 
proposed Form ATS-N would require an NMS Stock ATS to describe any 
arrangements or procedures for reporting transactions on the NMS Stock 
ATS and if the trade reporting procedures are not the same for all 
subscribers and persons, the NMS Stock ATS would be required to 
describe any differences. Part IV, Item 13(b) of proposed Form ATS-N 
would require an NMS Stock ATS to describe any arrangements or 
procedures undertaken by the NMS Stock ATS to facilitate the clearance 
and settlement of transactions on the NMS Stock ATS (e.g., whether the 
NMS Stock ATS becomes a counterparty, whether it submits trades to a 
registered clearing agency, or whether it requires subscribers to have 
arrangements with a clearing firm). If the clearance and settlement 
procedures are not the same for all subscribers and persons, the NMS 
Stock ATS would be required to describe any differences. The Commission 
notes that some of the proposed disclosure requirements of Part IV, 
Item 13 of proposed Form ATS-N are already required under current Form 
ATS. Exhibit F of current Form ATS requires ATSs to describe, among 
other things, their procedures governing execution, reporting, 
clearance, and settlement of transactions effected through the ATS. 
Consequently, ATSs that currently trade NMS stocks already have 
experience providing disclosures related to how they report, clear, and 
settle transactions on the ATS. Accordingly, the Commission 
preliminarily believes that preparing Part IV, Item 13 for a Form ATS-N 
would not impose a significant additional burden above the current 
baseline for an initial operation report on current Form ATS. The 
Commission preliminarily estimates that, on average, preparing Part IV, 
Item 13 for a Form ATS-N would add 0.5 hours to the current baseline 
for an initial operation report on current Form ATS to provide a more 
detailed description of the NMS Stock ATS's trade reporting, clearance, 
and settlement arrangements or procedures. This would result in an 
aggregate initial burden of 23 hours above the current baseline for all 
NMS Stock ATSs to complete Part IV, Item 13 of proposed Form ATS-
N.\640\
---------------------------------------------------------------------------

    \640\ Compliance Manager at 0.5 hours x 46 NMS Stock ATSs = 23 
burden hours.
---------------------------------------------------------------------------

    Part IV, Item 14 of proposed Form ATS-N would require an NMS Stock 
ATS to provide the following information if the NMS Stock ATS displays 
orders in an NMS stock to any person other than employees of the NMS 
Stock ATS and executed 5% or more of the average daily trading volume 
in that NMS stock as reported by an effective transaction reporting 
plan for four of the preceding six calendar months: (a) The ticker 
symbol for each NMS stock for each of the last 6 calendar months; (b) a 
description of the manner in which the NMS Stock ATS displays such 
orders on a national securities exchange or through a national 
securities association; and (c) a description of how the NMS Stock ATS 
provides access to such orders displayed in the national market system 
equivalent to the access to other orders displayed on that exchange or 
association. Part IV, Item 15 of proposed Form ATS-N would require an 
NMS Stock ATS to provide the following

[[Page 81104]]

information if the NMS Stock ATS executed 5% or more of the average 
daily trading volume in an NMS stock as reported by an effective 
transaction reporting plan for four of the preceding six calendar 
months: (a) The ticker symbol for each NMS stock for each of the last 6 
calendar months; and (b) a description of the written standards for 
granting access to trading on the NMS Stock ATS. Current Form ATS does 
not require an ATS to disclose the information that would be required 
under Part IV, Items 14 and 15 of proposed Form ATS-N. However, based 
on the experience of the Commission and its staff, the Commission 
preliminarily believes that no ATSs currently executed 5% or more of 
the average daily volume in an NMS Stock as reported by an effective 
transaction reporting plan for four of the preceding six calendar 
months, and the Commission preliminarily believes that most--if not 
all--ATSs that currently trade NMS stocks already have procedures in 
place to prevent that threshold from being crossed on the ATS's system. 
Historically, ATSs have crossed these thresholds very rarely, with at 
most three ATSs that trade NMS stocks crossing either of the thresholds 
in any given year.
    If, however, an NMS Stock ATS were to cross these 5% thresholds, a 
disclosure burden related to amending a Form ATS-N to complete Part IV, 
Items 14 and 15 of proposed Form ATS-N would result. Because Items 14 
and 15 of Part IV are tied to existing obligations that arise from 
crossing the 5% thresholds pursuant to Rule 301(b)(3) and Rule 
301(b)(5)(ii)(A) of Regulation ATS, respectively, the Commission 
preliminarily believes that NMS Stock ATSs should already be generally 
aware of the procedures they would follow if the 5% thresholds were 
crossed, which should reduce the burden associated with the disclosures 
that would be required under Items 14 and 15. The Commission notes that 
an NMS Stock ATS would only have to respond to Part IV, Items 14 or 15 
of a Form ATS-N if the NMS Stock ATS previously operated as an ATS and 
triggered the applicable 5% thresholds. The Commission further notes 
that NMS Stock ATSs would be less likely to have to complete Item 14 as 
compared to Item 15 because Item 14 requires as an additional 
precondition that the NMS Stock ATS displays orders in an NMS stock to 
a person other than employees of the NMS Stock ATS. For new NMS Stock 
ATSs (i.e., NMS Stock ATSs that did not previously operate as an ATS), 
the NMS Stock ATS would not have been in operation for at least four 
months to trigger the applicable thresholds, meaning that such NMS 
Stock ATSs would only be required to complete Item 14 or 15 (or both) 
in a Form ATS-N Amendment. The Commission preliminarily estimates that 
completion of Part IV, Item 14 or 15 in a Form ATS-N Amendment (or in a 
Form ATS-N in the case of an NMS Stock ATS that previously operated as 
an ATS), would be 5 hours per item.
    As explained above, the Commission notes that triggering the 5% 
threshold, a precondition necessary to require completion of Part IV, 
Items 14 and 15 of proposed Form ATS-N, currently occurs, and the 
Commission preliminarily estimates would continue to occur, very 
infrequently. Based on the review of Form ATS and Form ATS-R 
disclosures by the Commission and its staff, the Commission 
preliminarily estimates that 1 NMS Stock ATS would have to complete 
Item 14 and 2 NMS Stock ATSs would have to complete Item 15 in any 
given year. Accordingly, the Commission preliminarily estimates that 
the disclosures that would be required under Part IV, Items 14 and 15 
of proposed Form ATS-N would result in an aggregate initial burden of 
15 hours above the current baseline.\641\
---------------------------------------------------------------------------

    \641\ (Attorney at 2 hours + Compliance Manager at 1 hour + Sr. 
Systems Analyst at 2 hours) x 3 NMS Stock ATSs = 15 burden hours.
---------------------------------------------------------------------------

    Part IV, Item 16 of proposed Form ATS-N would require an NMS Stock 
ATS to explain and provide certain aggregate platform-wide market 
quality statistics that it publishes or otherwise provides to 
subscribers regarding the NMS Stock ATS. Under Item 16, if the NMS 
Stock ATS publishes or otherwise provides to one or more subscribers 
aggregate platform-wide order flow and execution statistics of the NMS 
Stock ATS that are not otherwise required disclosures under Exchange 
Act Rule 605 of Regulation NMS, it would be required to: (i) List and 
describe the categories of the aggregate platform-wide order flow and 
execution statistics published or provided; (ii) describe the metrics 
and methodology used to calculate the aggregate platform-wide order 
flow and execution statistics; and (iii) attach as Exhibit 5 the most 
recent disclosure of the aggregate platform-wide order flow and 
execution statistics published or provided to one or more subscribers 
for each category or metric as of the end of the calendar quarter. An 
NMS Stock ATS would not be required to develop or publish any new 
statistics for purposes of making the required disclosures under Item 
16; it would only be required to make the disclosures for statistics it 
already otherwise collects and publishes in the course of its 
operations. Thus, NMS Stock ATSs that do not publish or otherwise 
provide aggregate platform-wide market quality statistics would not 
incur any additional burden due to the proposed disclosure requirements 
of Item 16. For NMS Stock ATSs that do provide such statistics, Item 16 
would impose an additional burden above the baseline because current 
Form ATS does not require the disclosure of market quality statistics. 
The Commission preliminarily estimates that preparing Part IV, Item 16 
for a Form ATS-N would add 7 hours to the current baseline for an 
initial operation report on current Form ATS. This would result in an 
aggregate initial burden of 322 hours above the current baseline for 
all NMS Stock ATSs to complete Part IV, Item 16 of proposed Form ATS-
N.\642\
---------------------------------------------------------------------------

    \642\ (Attorney at 1 hour + Compliance Manager at 1 hour + 
Senior Systems Analyst at 5 hours) x 46 NMS Stock ATSs = 322 burden 
hours.
---------------------------------------------------------------------------

ii. Estimated Burden above the Current Baseline for a Form ATS-N, Form 
ATS-N Amendment, and Notice of Cessation on Form ATS-N

A. Proposed Form ATS-N

    Based on the above analysis of the estimated additional burden for 
a proposed Form ATS-N, the Commission preliminarily estimates that a 
proposed Form ATS-N will, on average, require an estimated 121.3 burden 
hours above the current baseline for an initial operation report on 
current Form ATS. This results in an estimated 141.3 hours in total, 
including the current baseline.\643\ The Commission notes that ATSs 
that trade NMS stocks vary in terms of their structure and the manner 
in which they operate. ATSs that currently trade NMS stocks also vary 
with respect to the depth and extent of their disclosures on Form ATS. 
Consequently, the Commission preliminarily believes that the estimated 
hour burdens herein regarding proposed Form ATS-N would likely vary 
among NMS Stock ATSs, depending on such

[[Page 81105]]

factors as the extent of their current disclosures on Form ATS, the 
complexity and structure of their system, and the extent of their other 
broker-dealer activities.
---------------------------------------------------------------------------

    \643\ (Current Baseline at 20 hours) + (Parts I and II at 0.5 
hours) + (Part III at an average of 47 hours) + (Part IV at an 
average of 73.5 hours) + (Access to EFFS at 0.3 hours, see infra, 
Section XII.D.2.b.iv) = 141.3 burden hours. The aggregate totals by 
professional, including the baseline, are estimated to be 
approximately 54.8 hours for an Attorney, 43.5 hours for a 
Compliance Manager, 34.5 hours for a Sr. Systems Analyst, 1 hour for 
a Sr. Marketing Manager, and 7.5 hours for a Compliance Clerk.
    This preliminary estimated burden for a Form ATS-N includes the 
hour burden associated with completing Part III, Item 2 and Part IV, 
Items 14 and 15 of proposed Form ATS-N. As explained above, however, 
the Commission preliminarily believes that the majority of NMS Stock 
ATSs would not be required to complete those items of the proposed 
form.
---------------------------------------------------------------------------

B. Form ATS-N Amendments

    As previously noted, the Commission currently estimates that ATSs 
that trade NMS stocks submit 2 amendments, on average, each year.\644\ 
The Commission preliminarily estimates that the 46 respondents will 
file 3 Form ATS-N Amendments each year, for an estimated total of 138 
Form ATS-N Amendments. The Commission notes that proposed Rule 
304(a)(2) of Regulation ATS will contain the same three general 
categories of required amendments for proposed Form ATS-N as Rule 
301(b)(2) of Regulation ATS currently requires for current Form 
ATS.\645\ However, due to the greater detail and number of disclosures 
required by proposed Form ATS-N, the Commission preliminarily believes 
that respondents may find it necessary to file a greater number of 
amendments to proposed Form ATS-N than ATSs that trade NMS stocks 
currently do on Form ATS. For example, many of the disclosures related 
to the broker-dealer operator of the NMS Stock ATS contained in Part 
III of proposed Form ATS-N, which are not required disclosures under 
current Form ATS, would require an NMS Stock ATS to file Form ATS-N 
Amendments if the information provided on Form ATS-N changed.
---------------------------------------------------------------------------

    \644\ See supra note 594 and accompanying text. During the 
fiscal year of 2014, the Commission received 101 amendments from 
ATSs that trade NMS stocks, of which there were approximately 45 at 
any given time during 2014. Some ATSs that trade NMS stocks filed as 
many as 3 amendments while others did not file any amendments in 
2014.
    \645\ See 17 CFR 242.301(b)(2).
---------------------------------------------------------------------------

    As noted above, the Commission currently estimates that the hourly 
burden related to an amendment to Form ATS is 6 hours.\646\ The 
Commission preliminarily estimates that the average hourly burden above 
this current baseline of 6 hours for each Form ATS-N Amendment would be 
3 hours to accommodate the more voluminous and detailed disclosures 
required by Form ATS-N as compared to Form ATS.\647\ An NMS Stock ATS 
would also be required to provide a brief narrative description of the 
amendment at the top of Form ATS-N and a redline(s) showing changes to 
Part III and/or Part IV of proposed Form ATS-N.\648\ The Commission 
preliminarily estimates that this requirement would add an additional 
burden of 0.5 hours to draft the summary and prepare the redline 
version(s) showing the amendments the NMS Stock ATS is making.\649\ 
This would result in a total estimated hourly burden, including the 
baseline, of 9.5 hours for a Form ATS-N Amendment,\650\ and an 
aggregate annual burden on all NMS Stock ATSs of 1,311 hours.\651\ The 
Commission notes that the frequency and scope of Form ATS-N Amendments 
would likely vary, similar to amendments to Form ATS, depending on 
whether the NMS Stock ATS is implementing a significant change 
requiring substantial revisions to its Form ATS-N or whether the 
changes are less significant, such as updating the address of the NMS 
Stock ATS. Some NMS Stock ATSs might not file any Form ATS-N Amendments 
in a given year, while others--such as NMS Stock ATSs that publish or 
otherwise provide to one or more subscribers aggregate platform-wide 
market quality statistics that would be covered by Part IV, Item 16 of 
proposed Form ATS-N \652\--may file several Form ATS-N Amendments per 
year.
---------------------------------------------------------------------------

    \646\ See supra note 595 and accompanying text.
    \647\ Attorney at 1 hour + Compliance Manager at 2 hours = 3 
burden hours above the baseline.
    \648\ See Exhibits 3A and 4A to proposed Form ATS-N.
    \649\ Compliance Clerk at 0.5 hours. The Commission notes that 
most word processing software provides for this functionality.
    \650\ Attorney at 5.5 hours + Compliance Manager at 2 hours + 
Compliance Clerk at 2 hours = 9.5 burden hours.
    \651\ 138 amendments per year x 9.5 hours = 1,311 aggregate 
burden hours. The Commission further estimates that gaining access 
to EFFS for one additional person on an annual basis would require 
0.15 burden hours for each NMS Stock ATS, or 7 hours annually for 
all NMS Stock ATSs (46 x 0.15 hours = 6.9 hours). Therefore, the 
aggregate burden hours equals 1,317.9 hours (1,311 hours + 6.9 
hours).
    \652\ See supra Section VIII.P.
---------------------------------------------------------------------------

C. Notice of Cessation on Proposed Form ATS-N

    As previously noted, from 2012 through the first half of 2015, 
there have been an average of 6 ATSs that trade NMS stocks that cease 
operations each year.\653\ Although it is unclear how many NMS Stock 
ATSs might cease operations each year going forward, for purposes of 
making a PRA burden estimate, the Commission is estimating that this 
average would generally remain the same for NMS Stock ATSs using Form 
ATS-N as economic conditions, business reasons, and other factors may 
cause some NMS Stock ATSs to cease operations. Accordingly, the 
Commission preliminarily estimates that 6 respondents may to file a 
cessation of operation report on proposed Form ATS-N each year. The 
Commission preliminarily believes that the burden for filing a 
cessation of operation report on proposed Form ATS-N will not be 
significantly greater than that for filing a cessation of operation 
report on current Form ATS because proposed Form ATS-N does not contain 
any additional requirements for a cessation of operation report. For 
both Form ATS and proposed Form ATS-N, the primary requirement is to 
check the appropriate box indicating that the ATS is ceasing 
operations. Accordingly, the Commission preliminarily estimates that 
the average compliance burden for each response would be 2 hours.\654\ 
This would result in an aggregate annual burden of 12 hours for NMS 
Stock ATSs that choose to cease operations and submit a cessation of 
operation report on Form ATS-N.\655\
---------------------------------------------------------------------------

    \653\ See supra Section XII.C.
    \654\ Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 4 
burden hours. See supra note 597, and accompanying text.
    \655\ 2 burden hours x 6 NMS Stock ATSs = 12 aggregate annual 
burden hours.
---------------------------------------------------------------------------

iii. ATSs That Transact in Both NMS and Non-NMS Stocks
    Under proposed Rule 301(b)(2)(viii) of Regulation ATS, an ATS that 
effects trades in both NMS stocks and non-NMS stocks would have to 
submit a Form ATS-N with respect to its trading of NMS stocks and a 
revised Form ATS that removes discussion of those aspects of the ATS 
related to the trading of NMS stocks. Under the proposed amendments to 
Rule 301(b)(9), an ATS that effects trades in both NMS stocks and non-
NMS stocks would also be required to file separate Forms ATS-R--one 
disclosing trading volume in NMS stocks and one disclosing trading 
volume in non-NMS stocks. Therefore, ATSs that are subject to these 
proposed requirements would incur: (1) the above baseline burdens 
related to filing a Form ATS-N and Form ATS-N Amendments; \656\ (2) the 
additional burden of filing a new Form ATS to only disclose information 
related to non-NMS stock trading activity on the ATS; \657\ and (3) the 
burden of completing and filing two Forms ATS-R.\658\
---------------------------------------------------------------------------

    \656\ See supra Sections XII.D.2.b.ii.A and B.
    \657\ See supra Section XII.D.2.a and accompanying text for the 
baseline estimates for submitting an IOR for Form ATS and amendments 
to Form ATS.
    \658\ See supra note 598 and accompanying text for the baseline 
estimate for submitting a Form ATS-R.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that the total hourly burden 
for an ATS to separately file a Form ATS for its non-NMS stock trading

[[Page 81106]]

activity and Form ATS-N for its NMS stock trading activity would be 20 
burden hours for the initial operation report on Form ATS for its non-
NMS stock trading activity and 141.3 burden hours for its Form ATS-N. 
The Commission notes that the estimated hour burden related to the 
initial operation report submission on Form ATS for non-NMS stock 
trading activity might be less than the estimated 20 burden hours, as, 
to the extent the NMS Stock ATS in question is currently operating, the 
description of its non-NMS stock trading activity should already be 
contained in its existing Form ATS.\659\ As previously noted, there are 
currently 11 ATSs that trade, or have indicated that they expect to 
trade in Exhibit B to their Form ATS, both NMS stocks and non-NMS 
stocks on the ATS. Consequently, the Commission preliminarily estimates 
that the aggregate initial burden on ATSs to file these separate forms 
would be 1,774.3 hours, and the aggregate annual burden for filing 
amendments to both forms would be 445.5 hours.\660\
---------------------------------------------------------------------------

    \659\ The hourly burden related to amendments to its Form ATS 
and Form ATS-N would remain unchanged: 6 estimated burden hours for 
amendments to Form ATS, and 9.5 estimated burden hours for Form ATS-
N Amendments. See supra notes 646-650 and accompanying text.
    \660\ (Form ATS initial operation report at 20 hours + Form ATS-
N at 141.3 hours) x 11 ATSs = 1,774.3 aggregate burden hours. Using 
the estimates of 2 amendments each year to Form ATS, see supra 
Section XII.D.2.a, and 3 amendments each year to Form ATS-N, see 
supra Section XII.D.2.b.ii.B, the ongoing aggregate burden for these 
bifurcated ATSs would be ((2 Form ATS Amendments per year x 6 hours) 
+ (3 Form ATS-N Amendments per year x 9.5 hours)) x 11 respondents = 
445.5 aggregate ongoing burden hours per year relating to 
amendments.
---------------------------------------------------------------------------

    The Commission estimates that the total burden for completing and 
filing two Form ATS-R would be 4.5 hours, which is 0.5 hours \661\ 
above the current baseline burden of 4 hours for filing a Form ATS-
R.\662\ The Commission preliminarily believes that ATSs required to 
file two Forms ATS-R would incur an additional burden above the 
baseline because they would be required to divide their trading 
statistics between two forms and file each form separately. The 
Commission does not believe that those ATSs would incur any additional 
burden to collect the required information because they currently 
assemble that information when preparing their current Form ATS-R 
filings. As previously noted, there are currently 11 ATSs that trade, 
or have indicated that they expect to trade in Exhibit B to their Form 
ATS, both NMS stocks and non-NMS stocks on the ATS; those ATSs would be 
required to file a pair of Forms ATS-R four times annually. 
Consequently, the Commission estimates that the aggregate annual burden 
of filing two Forms ATS-R for those ATS that effect transactions in 
both NMS stocks and non-NMS stocks would be 198 hours.\663\
---------------------------------------------------------------------------

    \661\ Attorney at .5 hours = .5 burden hours.
    \662\ See supra note 598 and accompanying text for the baseline 
estimate for submitting a Form ATS-R.
    \663\ ((Attorney at 3.5 hours + Compliance Clerk at 1 hour) x (4 
filings annually)) x 11 ATSs = 198 aggregate burden hours.
---------------------------------------------------------------------------

iv. Access to EFFS
    The Commission proposes that Form ATS-N would be submitted 
electronically in a structured format and require an electronic 
signature.\664\ Currently, ATSs that transact in NMS stock do not have 
the ability to access and submit an electronic form. The proposed 
amendments to Regulation ATS would require that every NMS Stock ATS 
have the ability to submit forms electronically with an electronic 
signature. The Commission's proposal contemplates the use of an online 
filing system, the EFFS. Based on the widespread use and availability 
of the Internet, the Commission preliminarily believes that filing Form 
ATS-N in an electronic format would be less burdensome and a more 
efficient filing process for NMS Stock ATSs and the Commission, as it 
is likely to be less expensive and cumbersome than mailing and filing 
paper forms to the Commission.
---------------------------------------------------------------------------

    \664\ The Commission notes that all estimated burden hours with 
regard to completing Parts I-V of proposed Form ATS-N, which are 
explained above and herein, include the estimated burden associated 
with the proposed requirement that NMS Stock ATSs file proposed Form 
ATS-N in a structured format, including narrative responses that are 
block-text tagged.
---------------------------------------------------------------------------

    To access EFFS, an NMS Stock ATS would have to submit to the 
Commission an External Account User Application (``EAUA'') to register 
each individual at the NMS Stock ATS who would access the EFFS system 
on behalf of the NMS Stock ATS. The Commission is including in its 
burden estimates the burden for completing the EAUA for each individual 
at an NMS Stock ATS who would request access to EFFS. The Commission 
estimates that initially, on average, two individuals at each NMS Stock 
ATS would request access to EFFS through the EAUA, and each EAUA would 
take 0.15 hours to complete and submit. Therefore, each NMS Stock ATS 
would require a total of 0.3 hours to complete the requisite 
EAUAs,\665\ or approximately 13.8 hours for all NMS Stock ATSs.\666\ 
The Commission also preliminarily estimates that annually, on average, 
one individual at each NMS Stock ATS will request access to EFFS 
through the EAUA.\667\ Therefore, the ongoing burden to complete the 
EAUA would be 0.15 hours annually for each NMS Stock ATS,\668\ or 
approximately 6.9 hours annually for all NMS Stock ATSs.\669\
---------------------------------------------------------------------------

    \665\ 0.15 hours per EAUA x 2 individuals = 0.3 burden hours per 
NMS Stock ATS. These estimates are based on the Commission and its 
staff's experience with EFFS and EAUAs pursuant to Rule 19b-4 under 
the Exchange Act. The 0.3 hours represents the time spent by two 
attorneys. The Commission believes it is appropriate to estimate 
that, on average, each NMS Stock ATS will submit two EAUAs 
initially.
    \666\ 0.30 hours x 46 NMS Stock ATSs = 13.8 burden hours.
    \667\ The Commission estimates that annually, on average, one 
individual at each NMS Stock ATS will request access to EFFS through 
EAUA to account for the possibility that an individual who 
previously had access to EFFS may no longer be designated as needing 
such access.
    \668\ 0.15 hours per EAUA x 1 individual = 0.15 burden hours.
    \669\ 0.15 hours x 46 NMS Stock ATSs = 6.9 burden hours.
---------------------------------------------------------------------------

    In addition, the Commission estimates that each NMS Stock ATS will 
designate 2 individuals to sign Form ATS-N each year. An individual 
signing a Form ATS-N must obtain a digital ID, at the cost of 
approximately $25 each year. Therefore, each NMS Stock ATS would pay 
approximately $50 annually to obtain digital IDs for the individuals 
with access to EFFS for purposes of signing Form ATS-N,\670\ or 
approximately $2,300 for all NMS Stock ATSs.\671\
---------------------------------------------------------------------------

    \670\ $25 per digital ID x 2 individuals = $50 per NMS Stock 
ATS.
    \671\ $50 per NMS Stock ATS x 46 NMS Stock ATSs = $2,300.
---------------------------------------------------------------------------

v. Public Posting on NMS Stock ATS's Web Site
    Proposed Rule 304(b)(3) would require each NMS Stock ATS to make 
public via posting on the NMS Stock ATS's Web site a direct URL 
hyperlink to the Commission's Web site that contains the documents 
enumerated in proposed Rule 304(b)(2). The Commission preliminarily 
estimates that each NMS Stock ATS would incur an initial, one-time 
burden to program and configure its Web site in order to post the 
required direct URL hyperlink pursuant to proposed Rule 304(b)(3). The 
Commission preliminarily estimates that this initial, one-time burden 
would be approximately 2 hours.\672\ Because the Commission 
preliminarily believes that many broker-dealer operators currently 
maintain a Web site for their NMS Stock ATSs, the Commission 
preliminarily estimates that the aggregate initial, one-time

[[Page 81107]]

burden would be approximately 92 hours.\673\
---------------------------------------------------------------------------

    \672\ Senior Systems Analyst at 2 burden hours.
    \673\ Senior Systems Analyst at 2 hours x 46 NMS Stock ATSs = 92 
burden hours.
---------------------------------------------------------------------------

vi. Recordkeeping Requirements
    As noted above, the Commission proposes to amend Rule 303(a)(2)(ii) 
\674\ of Regulation ATS to provide that all ATSs must preserve copies 
of all reports filed pursuant to proposed Rule 304 for the life of the 
enterprise and any successor enterprise.
---------------------------------------------------------------------------

    \674\ 17 CFR 242.303(a)(2)(ii).
---------------------------------------------------------------------------

    Rule 303(a)(ii) currently requires an ATS to preserve copies of 
reports filed pursuant to Rule 301(b)(2), which include all Form ATS 
filings, for the life of the enterprise and any successor enterprise. 
Because NMS Stock ATSs that solely trade NMS stocks would be filing 
Form ATS-N in lieu of Form ATS under this proposal, the Commission 
believes that the proposed amendment to Rule 303(a)(ii) would not 
result in any burden for those ATSs that is not already accounted for 
under the current baseline burden estimate for Rule 303.\675\ For the 
11 ATSs that trade, or have indicated in Exhibit B to their Form ATS 
that they expect to trade both NMS stocks and non-NMS stocks on the 
ATS, the Commission preliminarily estimates that the burden above the 
current baseline estimate for preserving records relating to compliance 
with the proposed amendment to Rule 303(a)(ii) would be approximately 3 
hours annually per ATS for a total annual burden above the current 
baseline burden estimate of 33 hours for all respondents.\676\ 
Accordingly, the Commission proposes to modify the current PRA burden 
for Rule 303 to account for the increased burden on ATSs that trade 
both NMS stocks and non-NMS stocks.
---------------------------------------------------------------------------

    \675\ To comply with all of the record preservation requirements 
of Rule 303, the Commission currently estimates that ATSs spend 
approximately 1,380 hours per year. See Rule 303 PRA Update, supra 
note 580, 78 FR 43943. At an average cost per burden hour of 
$104.20, the resultant total related cost of compliance is $143,796 
per year (1,380 burden hours x $104.20/hour). See id.
    \676\ 3 additional burden hours x 11 ATSs = 33 aggregate burden 
hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    All collections of information pursuant to the proposed rules would 
be mandatory for entities that meet the definition of NMS Stock ATS.

F. Confidentiality of Responses to Collection of Information

    With respect to the proposed amendments to Rules 301(b)(2)(viii) 
and 304 of Regulation ATS, including proposed Form ATS-N, the 
Commission would make publicly available on its Web site all Forms ATS-
N upon being declared effective. The Commission would also make 
publicly available on its Web site all properly filed Form ATS-N 
Amendments, and notices of cessation on Form ATS-N. The Commission 
would not make publicly available on its Web site Forms ATS-N that the 
Commission has declared ineffective, but these forms would be available 
for examination by the Commission and its staff, state securities 
authorities, and self-regulatory organizations. The proposed Form ATS 
amendments would also require each NMS Stock ATS that has a Web site to 
post on the NMS Stock ATS's Web site a direct URL hyperlink to the 
Commission's Web site that contains the documents enumerated in 
proposed Rule 304(b)(2). The collection of information required by the 
proposed amendments to Rules 301(b)(10), 303(a)(1)(v), 301(b)(9), and 
303(a)(2)(ii) would not be made public, but would be used for 
regulatory purposes by the Commission and the SRO(s) of which the ATS's 
broker-dealer operator is a member. In Part III, Item 10 of Form ATS-N, 
however, NMS Stock ATSs would be required to describe the written 
safeguards and written procedures to ensure confidential treatment of 
trading information that would be required under the proposed amendment 
to Rule 301(b)(10); as explained above, the Commission would make 
certain Form ATS-N filings publicly available. To the extent that the 
Commission receives confidential information pursuant to this 
collection of information, such information would be kept confidential, 
subject to the provisions of applicable law.

G. Retention Period for Recordkeeping Requirements

    All reports required to be made under proposed Rules 
301(b)(2)(viii), 301(b)(9), and 304 of Regulation ATS, including 
Proposed Form ATS-N, would be required to be preserved during the life 
of the enterprise and any successor enterprise, pursuant to the 
proposed amendment to Rule 303(a)(2) of Regulation ATS.
    ATSs would be required to preserve a copy of their written 
safeguards and written procedures to protect subscribers' confidential 
trading information under proposed Rule 301(b)(10) of Regulation ATS 
for not less than 3 years, the first 2 years in an easily accessible 
place, pursuant to proposed Rule 303(a)(1)(v) of Regulation ATS.

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comment to:
    1. Evaluate whether the proposed collection of information is 
necessary for the proper performance of our functions, including 
whether the information shall have practical utility;
    2. Evaluate the accuracy of our estimate of the burden of the 
proposed collection of information;
    3. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    4. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.

Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File Number S7-23-15. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File Number S7-23-15 and be submitted to the Securities and Exchange 
Commission, Office of FOIA/PA Services, 100 F Street NE., Washington, 
DC 20549-2736. As OMB is required to make a decision concerning the 
collections of information between 30 and 60 days after publication, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

XIII. Economic Analysis

A. Background

    The Commission is concerned that the current regulatory 
requirements relating to operational transparency for NMS Stock ATSs 
may no longer fully meet the goals of furthering the public interest 
and protecting investors. The market for NMS stock execution services 
consists of registered national securities exchanges, NMS Stock ATSs, 
and non-ATS broker-dealers that effect OTC transactions. As of the 
second quarter of 2015, NMS Stock ATSs account for approximately 15.4% 
of the total dollar volume in NMS stocks and compete with, and operate 
similar to, registered national securities exchanges.

[[Page 81108]]

However, relative to registered national securities exchanges, there is 
limited and differential information publicly available to market 
participants about how NMS Stock ATSs operate, including how orders 
interact, match, and execute, and the activities of the broker-dealer 
operators and their affiliates. Not only is there a lack of consistency 
with respect to the quality of information that market participants 
receive from different NMS Stock ATSs, there are also differences due 
to the fact that for a given NMS Stock ATS, some subscribers might have 
more detailed information relative to other subscribers about how 
orders interact, match, and execute on the ATS.
    Currently, NMS Stock ATSs provide the Commission with notice of 
their initial operations and changes to their operations on Form ATS. 
Although some NMS Stock ATSs voluntarily make their Form ATS publicly 
available on their Web site, they are not required to do so, as Form 
ATS is ``deemed confidential when filed.'' \677\ In light of this, 
subscribers to these NMS Stock ATSs may have more information about the 
operations of these NMS Stock ATSs relative to subscribers to NMS Stock 
ATSs that do not make their Form ATS public. Moreover, an NMS Stock ATS 
may also make different information available to certain market 
participants about its operations than it does to other market 
participants. The Commission is concerned that this limited and 
differential level of operational transparency around NMS Stock ATSs 
may impede market participants' ability to adequately discern how their 
orders interact, match, and execute on NMS Stock ATSs, or fully 
understand the activities of an NMS Stock ATS's broker dealer-operator 
and its affiliates, and the conflicts that may arise from such 
activities. This could thereby impede a market participant's ability to 
evaluate whether submitting order flow to a particular NMS Stock ATS 
aligns with its business interests and would help it achieve its 
investing or trading objectives. In addition, the Commission is 
concerned that the current lack of transparency around the potential 
conflicts of interest that arise from the activities of the broker-
dealer operator and its affiliates hinders market participants' 
abilities to protect their interests when doing business on the NMS 
Stock ATS.
---------------------------------------------------------------------------

    \677\ See 17 CFR 242.301(b)(2)(vii).
---------------------------------------------------------------------------

    The Commission is concerned that the current market for NMS stock 
execution services does not address the problems described above. 
Rather, when demanding services that are typically offered by NMS Stock 
ATSs--particularly, dark pools--some market participants trade off the 
less stringent transparency requirements applicable to NMS Stock ATSs, 
as compared to national securities exchanges, in exchange for obtaining 
some perceived advantages of trading on these venues, such as keeping 
their orders dark prior to execution.\678\ Furthermore, the difficulty 
involved in comparing the operations and execution quality of an NMS 
Stock ATS to the operations and execution quality of national 
securities exchanges or other NMS Stock ATSs may limit the ability of 
market participants to judge whether that tradeoff actually benefits 
either themselves or their customers when sending orders to a 
particular NMS Stock ATS. For example, as noted above, a certain 
category of subscribers may have access to services offered by an NMS 
Stock ATS that are not offered to another category of subscribers, but 
subscribers that fall under the latter category may not be fully aware 
of any potential disadvantages when submitting orders to that NMS Stock 
ATS.\679\ Furthermore, the Commission preliminarily believes that the 
NMS Stock ATS would generally not have a strong incentive to fully 
reveal how it operates to either category of subscriber under the 
current regulatory regime.
---------------------------------------------------------------------------

    \678\ See supra notes 123-126 and accompanying text.
    \679\ See supra Section VII.B.4.
---------------------------------------------------------------------------

    The Commission is proposing to amend Regulation ATS to adopt new 
Rule 304, which would provide a process for the Commission to determine 
if an NMS Stock ATS qualifies for the exemption from the definition of 
``exchange'' pursuant to Rule 3a1-1(a)(2) and declare an NMS Stock 
ATS's Forms ATS-N either effective or ineffective. The proposal would 
also provide a process for the Commission to suspend, limit, or revoke 
an NMS Stock ATS's exemption from the definition of ``exchange'' under 
certain circumstances. The Commission is also proposing to amend 
Regulation ATS to require NMS Stock ATSs to file Form ATS-N, which 
would require NMS Stock ATSs to provide detailed disclosures about 
their trading operations and the activities of their broker-dealer 
operators and their affiliates. The Commission is proposing to make 
certain Form ATS-N filings public by posting them on the Commission's 
Web site and requiring each NMS Stock ATS that has a Web site to post 
on the NMS Stock ATS's Web site a direct URL hyperlink to the 
Commission's Web site that contains the documents enumerated in 
proposed Rule 304(b)(2). The Commission is also proposing to amend Rule 
301(b)(10) of Regulation ATS to require that all ATSs have their 
procedures and safeguards to protect subscribers' confidential trading 
information in writing. The proposed amendments seek to improve and 
make more consistent the information available to market participants 
regarding different NMS Stock ATSs' operations and the activities of 
their broker-dealer operators and their affiliates. The proposed 
amendments also aim to make the level and type of disclosures more 
consistent between NMS Stock ATSs. The Commission preliminarily 
believes that making publicly available a more consistent level of 
information to all market participants would help them to better 
evaluate NMS Stock ATSs as potential routing destinations for their 
orders.
    The Commission is sensitive to the economic consequences and 
effects, including the costs and benefits, of its rules. The following 
economic analysis identifies and considers the costs and benefits--
including the effects on efficiency, competition, and capital 
formation--that may result from the amendments to Regulation ATS being 
proposed. These costs and benefits are discussed below and have 
informed the policy choices described throughout this release.\680\
---------------------------------------------------------------------------

    \680\ Exchange Act Section 3(f) requires the Commission, when it 
is engaged in rulemaking pursuant to the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation. See 15 U.S.C. 78c(f). In 
addition, Exchange Act Section 23(a)(2) requires the Commission, 
when making rules pursuant to the Exchange Act, to consider among 
other matters the impact that any such rule would have on 
competition and not to adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

B. Baseline

    The enhanced transparency and oversight of NMS Stock ATSs that the 
Commission preliminarily believes would result from the proposed 
amendments to Regulation ATS would increase the amount of information 
and improve the quality of information available to all market 
participants about the operations of NMS Stock ATSs and the activities 
of their broker-dealer operators and their affiliates. As a result, 
this information should better inform market participants making 
decisions about which trading venue to route their orders to. The 
proposed amendments would also affect the

[[Page 81109]]

competitive dynamics between trading venues that compete for order 
flow. The numerous parties that would be affected by the proposed 
amendments include: Existing NMS Stock ATSs; potential new NMS Stock 
ATSs; current and potential subscribers of NMS Stock ATSs; broker-
dealers that are affiliated with NMS Stock ATSs and their customers; 
non-ATS affiliated broker-dealers and their customers; broker-dealers 
that do not operate NMS Stock ATSs but send order flow to NMS Stock 
ATSs; institutional investors that periodically transact large trades 
on NMS Stock ATSs; other persons that seek to effect transactions in 
NMS stocks on ATSs; and registered national securities exchanges that 
compete for order flow with NMS Stock ATSs.
    The baseline against which economic costs and benefits, as well as 
the impact of the proposed amendments on efficiency, competition, and 
capital formation, are measured is the current market and regulatory 
framework for trading NMS stocks. The baseline, discussed in further 
detail below, includes statistics on the number of NMS Stock ATSs; 
current reporting requirements for NMS Stock ATSs; the lack of public 
disclosure of NMS Stock ATSs' operations, as well as disparate levels 
of information available to market participants about NMS Stock ATSs' 
operations and the activities of their broker-dealer operators and 
their affiliates; and the competitive environment between registered 
national securities exchanges and NMS Stock ATSs, among NMS Stock ATSs, 
and between broker-dealers that operate NMS Stock ATSs and broker-
dealers that do not operate NMS Stock ATSs.
1. Current NMS Stock ATSs
    In a concept release on equity market structure in 2010, the 
Commission stated that in the third quarter of 2009 there were 37 dark 
pools and ECNs that traded NMS stocks, and that they accounted for 
18.7% of total NMS share volume.\681\ From mid-May to mid-September 
2014, the trading volume of ATSs accounted for approximately 18% of the 
total dollar volume in NMS stocks.\682\ During the second quarter in 
2015, 38 ATSs traded NMS stocks \683\ and these 38 ATSs accounted for 
approximately 59 billion shares traded in NMS stocks (approximately 
$2.5 trillion in dollar volume), representing approximately 15.0% of 
total share trading volume (15.4% of total dollar trading volume) on 
all registered national securities exchanges, ATSs, and non-ATS OTC 
trading venues in the second quarter of 2015.\684\ There have been 
several changes in the market for NMS stocks execution services that 
may explain the volatility in fraction of share and dollar volume 
executed on NMS Stock ATSs since 2009. First, two ECNs have now 
registered as national securities exchanges.\685\ Second, there has 
been a rise in the number of ATSs operating as dark pools. Since the 
third quarter of 2009, the number of ATSs operating as dark pools has 
increased from 32 \686\ to more than 40 today.\687\ In 2009, dark pools 
accounted for 7.9% of NMS share volume \688\ and by the second quarter 
of 2015, they accounted for 14.9% of NMS share volume.\689\ In summary, 
in recent years, the number of NMS Stock ATSs has increased, and the 
percentage of NMS stocks executed in dark pools has also increased.
---------------------------------------------------------------------------

    \681\ The Commission used data from the third quarter of 2009. 
Of these 37 ATSs that traded NMS stocks, 32 were classified as dark 
pools and 5 were classified as ECNs. These dark pools accounted for 
7.9% of total NMS share volume and the ECNs accounted for 10.8% of 
total NMS share volume. Of the 10.8% attributable to ECNs, 9.8% was 
attributable to two ECNs that were operated by Direct Edge, which 
subsequently registered as national securities exchanges. See 2010 
Equity Market Structure Release, supra note 124, at 3598-3599.
    \682\ See SCI Adopting Release, supra note 17, at 72266 n.148 
and accompanying text and n.150.
    \683\ See infra Table 1, ``NMS Stock ATSs Ranked by Dollar 
Trading Volume--March 30, 2015 to June 26, 2015.''
    \684\ See infra Table 1 ``NMS Stock ATSs Ranked by Dollar 
Trading Volume--March 30, 2015 to June 26, 2015.'' Total dollar 
trading volume on all exchanges and off-exchange trading in the 
second quarter of 2015 was approximately $16.3 trillion and 
approximately 397 billion shares. See id.
    \685\ EDGA Exchange, Inc. and EDGX Exchange, Inc. (f/k/a Direct 
Edge ECN) previously operated as ECNs and are now registered 
national securities exchanges. See In the Matter of the Applications 
of EDGX Exchange, Inc., and EDGA Exchange, Inc. for Registration as 
National Securities Exchanges: Findings, Opinion, and Order of the 
Commission, Securities Exchange Act Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010) (File Nos. 10-194 and 10-196). 
Prior to 2009, there were other ECNs that also became national 
securities exchanges. BATS Exchange Inc. (f/k/a BATS ECN) previously 
operated as an ECN and is now a registered national securities 
exchange. See In the Matter of the Application of BATS Exchange Inc. 
for Registration as National Securities Exchange: Findings, Opinion, 
and Order of the Commission, Securities Exchange Act Release No. 
58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-
198). NYSE Arca, Inc., (f/k/a Archipelago) previously operated as an 
ECN and was acquired by the New York Stock Exchange LLC. See Order 
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 3, 
and 5 Thereto and Notice of Filing and Order Granting Accelerated 
Approval to Amendment Nos. 6 and 8 Relating to the NYSE's Business 
Combination With Archipelago Holdings, Inc., Securities Exchange Act 
Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) 
(SR-NYSE-2005-77). Finally, The Nasdaq Stock Market LLC, prior to 
becoming a national securities exchange, acquired Brut ECN and INET 
ECN. See In the Matter of the Application of the Nasdaq Stock Market 
LLC for Registration as National Securities Exchange: Findings, 
Opinion, and Order of the Commission, Securities Exchange Act 
Release No. 53128 (January 13, 2006), 71 FR 3550, n.137 (January 23, 
2006) (File No. 10-131).
    \686\ See supra note 133 and accompanying text.
    \687\ See supra note 134 and accompanying text.
    \688\ See supra note 135 and accompanying text.
    \689\ See infra Table 1 ``NMS Stock ATSs Ranked by Dollar 
Trading Volume--March 30, 2015 to June 26, 2015'' and based on data 
compiled from Forms ATS submitted to the Commission as of the end of 
the second quarter of 2015.
---------------------------------------------------------------------------

2. Current Reporting Requirements for NMS Stock ATSs
    Even though ATSs directly compete for order flow in NMS stocks with 
national securities exchanges, ATSs are exempt from the definition of 
``exchange'' and therefore are not required to register as national 
securities exchanges with the Commission. An ATS qualifies for an 
exemption from the definition of ``exchange'' provided by Exchange Act 
Rule 3a1-1(a)(2) on the condition that it complies with Regulation ATS, 
including registering as a broker-dealer, which includes joining a 
self-regulatory organization, such as FINRA. Thus, ATSs can collect and 
execute orders in securities electronically without registering as a 
national securities exchanges under Section 6 of the Exchange Act.
    A broker-dealer can become an ATS by filing an initial operation 
report on Form ATS at least 20 days before commencing operations. Form 
ATS requires, among other things, that the 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; the 
securities the ATS expects to trade; any entity other than the ATS 
involved in its operations; the manner in which the system operates; 
how subscribers access the trading system; procedures governing order 
entry and execution; and trade reporting and clearance and settlement 
of trades on the ATS. Form ATS is not approved by the Commission; \690\ 
rather, it provides the Commission with notice of an ATS's operations 
prior to commencing operations.\691\
---------------------------------------------------------------------------

    \690\ See supra Section II.B.
    \691\ See Instruction A.1 to Form ATS.
---------------------------------------------------------------------------

    An ATS must notify the Commission of any changes in its operations 
by filing an amendment to its Form ATS initial operation report under 
three circumstances. First, an ATS must amend Form ATS at least 20 days 
prior to implementing any material change to the operation of the 
ATS.\692\ Second, if any information contained in the initial operation 
report becomes inaccurate and has not already been reported to the

[[Page 81110]]

Commission as an amendment, the ATS must file an amendment on Form ATS 
within 30 calendar days after the end of each calendar quarter.\693\ 
Third, an ATS must also promptly file an amendment on Form ATS 
correcting information that it previously reported on Form ATS after 
discovery that the information was inaccurate when filed.\694\ 
Regulation ATS also requires ATSs to report certain information about 
transactions on the ATS and information about certain activities on 
Form ATS-R within 30 days after the end of each calendar quarter.\695\ 
Form ATS-R requires that ATSs report both total unit volume and dollar 
volume of their transactions over the quarter, as well as a list of all 
subscribers that were participants during the quarter and a list of all 
securities traded on the ATS at any time during the quarter.\696\ In 
addition to the reporting requirements of Form ATS and Form ATS-R, 
there are other conditions under Regulation ATS, including those that 
address order display and access; fees and fair access; capacity, 
integrity, and security of automated systems; examinations, 
inspections, and investigations; recordkeeping; procedures to protect 
subscribers' confidential treatment of trading information; and 
limitations on the name of the ATS.\697\
---------------------------------------------------------------------------

    \692\ See 17 CFR 242.301(b)(2)(ii).
    \693\ See 17 CFR 242.301(b)(2)(iii).
    \694\ See 17 CFR 242.301(b)(2)(iv).
    \695\ See 17 CFR 242.301(b)(9).
    \696\ See Form ATS-R.
    \697\ See supra Section II.B; see also 17 CFR 242.301(b).
---------------------------------------------------------------------------

    All ATSs are currently members of FINRA and must therefore comply 
with all FINRA rules applicable to broker-dealers. FINRA rules require 
ATSs to report transaction volume. For instance, FINRA Rule 4552 
requires each ATS to report to FINRA aggregate weekly trading volume on 
a security-by-security basis.\698\ FINRA publishes the information 
regarding NMS stocks in the S&P500 Index or the Russell 1000 Index and 
certain exchange-traded products on a two-week delayed basis, and the 
information on all other NMS stocks and OTC equity securities on a 
four-week delayed basis.\699\ In addition to FINRA Rule 4552, other 
rules pertaining to the operations of NMS Stock ATSs include FINRA 
Rules 6160 and 6170, which pertain to the use of a Market Participant 
Identifier (``MPID'') for trade reporting purposes.\700\
---------------------------------------------------------------------------

    \698\ See FINRA Rule 4552.
    \699\ See id.
    \700\ See FINRA Rules 6160 and 6170.
---------------------------------------------------------------------------

3. Lack of Public Disclosure of NMS Stock ATS Operations and the 
Activities of the Broker-Dealer Operator and the Broker-Dealer 
Operator's Affiliates
    Regulation ATS states that information on Form ATS is ``deemed 
confidential when filed.'' \701\ In the Regulation ATS Adopting 
Release, the Commission stated that preserving confidentiality of 
information on Form ATS would provide ATSs ``with the necessary comfort 
to make full and complete filings,'' and noted that information 
required on Form ATS ``may be proprietary and disclosure of such 
information could place alternative trading systems in a 
disadvantageous competitive position.'' \702\
---------------------------------------------------------------------------

    \701\ See 17 CFR 242.301(b)(2)(vii). While FINRA Rule 4552 
requires dissemination of aggregate weekly trading volume on the ATS 
by stock, this data does not reveal any information about the ATSs 
trading operations. Some ATSs such as IEX Trading have voluntarily 
made public information about order size and fill rates, as well as 
volume that is matched and routed, on a monthly basis. See, e.g., 
IEX ATS Statistics, http://www.iextrading.com/stats/.
    \702\ See Regulation ATS Adopting Release, supra note 7, at 
70864.
---------------------------------------------------------------------------

    Although the Commission does not require information provided on 
Form ATS to be made publicly available, the Commission has observed 
that some NMS Stock ATSs voluntarily make publicly available their 
Forms ATS.\703\ However, even when ATSs publicly disclose their Form 
ATS filings, it is often not easy for market participants to 
systematically compare one NMS Stock ATS to another based on these 
disclosures because the level of detail and the format in which it is 
presented on these Form ATSs may vary among the NMS Stock ATSs. In 
addition, the Commission notes that some of these NMS Stock ATSs do not 
make public the full version of the Form ATS that has been filed with 
the Commission. Also, NMS Stock ATSs are under no legal obligation to 
keep current a Form ATS they have made publicly available, so market 
participants cannot immediately confirm whether a publicly posted Form 
ATS is the most recent filing of the NMS Stock ATS.
---------------------------------------------------------------------------

    \703\ See supra note 156.
---------------------------------------------------------------------------

    Furthermore, different information is made available to different 
market participants regarding the operations of NMS Stock ATSs and the 
activities of NMS Stock ATSs' broker-dealer operators and their 
affiliates. NMS Stock ATSs that either voluntarily make their Form ATS 
publicly available, or publish summary information of their operations, 
may provide to market participants more information about their 
operations than NMS Stock ATSs that do not make their Forms ATS or 
information about their operations publicly available. Furthermore, 
subscribers to an NMS Stock ATS may have greater access to information 
about the NMS Stock ATS than other market participants, including the 
NMS Stock ATS's subscriber manual and access to other subscriber 
quotes.
    NMS Stock ATSs also disclose some execution quality metrics. 
Exchange Act Rule 605(a) requires every market center, including ATSs, 
to make publicly available for each calendar month a report containing 
standardized data on the covered orders in NMS stocks that it receives 
for execution from any market participant.\704\ Data on execution 
quality required under Exchange Act Rule 605(a) includes order sizes, 
execution sizes, effective spreads, price improvement, and quarterly 
volume of shares traded. As such, market participants have access to 
actual market quality statistics of execution quality on NMS Stock 
ATSs. The Commission recognizes that some NMS Stock ATSs may publish or 
otherwise disclose to subscribers market quality statistics that may be 
useful to those subscribers in addition to what is currently required 
by Exchange Act Rule 605. However, the Commission does not believe that 
such market quality statistics are standardized in terms of how they 
are calculated, and it does not know how much information subscribers 
that receive these market quality statistics have about how the NMS 
Stock ATS calculates the statistics. The Commission preliminarily 
believes that some subscribers may have access to more information 
about a given NMS Stock ATS than other ATSs, and also may have more 
information about that NMS Stock ATS than non-subscribers.
---------------------------------------------------------------------------

    \704\ A covered order shall mean any market order or any limit 
order (including immediate-or-cancel orders) received by a market 
center during regular trading hours at a time when a consolidated 
best bid and offer is being disseminated, and, if executed, is 
executed during regular trading hours, but shall exclude any order 
for which the customer requests special handling for execution, 
including, but not limited to, orders to be executed at a market 
opening price or a market closing price, orders submitted with stop 
prices, orders to be executed only at their full size, orders to be 
executed on a particular type of tick or bid, orders submitted on a 
``not held'' basis, orders for other than regular settlement, and 
orders to be executed at prices unrelated to the market price of the 
security at the time of execution. See Rule 605(a)(8).
---------------------------------------------------------------------------

    The differences in information that certain subscribers have about 
an NMS Stock ATS's operations may be manifested through channels other 
than having differential access to Form ATS, an NMS Stock ATS's 
subscriber manual, or being granted access to certain market quality 
statistics as provided by an NMS Stock ATS in addition to what is

[[Page 81111]]

currently publicly disclosed under Exchange Act Rule 605. To the extent 
that the NMS Stock ATS provides access to services to certain 
subscribers and not others, the subscribers with greater access to the 
services of an NMS Stock ATS could be in a position to obtain more 
knowledge and information about the operations of NMS Stock ATSs than 
those subscribers who have limited access to the services of the NMS 
Stock ATS. Therefore, subscribers who have greater access to services 
offered by the NMS Stock ATS may be able to make more informed choices 
about their trading decisions relative to subscribers who have limited 
access to the services of the NMS Stock ATS. For instance, a broker-
dealer operator may offer products or services in connection with a 
subscriber's use of the NMS Stock ATS, and, as a result, these 
subscribers may receive more favorable terms from the broker-dealer 
operator with respect to their use of the NMS Stock ATS. Such favorable 
terms could include preferential routing arrangements, access to 
certain order types, or access to a faster connection line to the ATS 
via a co-location service, as opposed to through the broker-dealer 
operator's SOR (or similar functionality) or algorithm. Granting access 
to these favorable terms can result in these subscribers having more 
detailed information about how their orders will interact, match, and 
execute relative to those of other subscribers. With this detailed 
information, these subscribers can make more nuanced decisions about 
which trading venue suits their trading purposes relative to other 
subscribers who do not have access to these services, and thus do not 
possess an informational advantage.
    Even if having greater access to the services of an NMS Stock ATS 
yields additional information about the operations of the NMS Stock ATS 
to certain subscribers, it is possible that subscribers that do not 
have full access to services of the NMS Stock ATS, and the resulting 
additional information, may still want to trade on NMS Stock ATSs in 
spite of their relative informational disadvantage. It is possible that 
had these subscribers possessed more detailed information about the 
operations of the NMS Stock ATS, they may have been able to make more 
informed--and therefore potentially different--decisions about where to 
route their orders for execution.
4. NMS Stock ATS Treatment of Subscriber Confidential Trading 
Information
    Under current Rule 301(b)(10) of Regulation ATS,\705\ all ATSs must 
establish adequate safeguards and procedures to protect subscribers' 
confidential trading information, and, to ensure that those safeguards 
and procedures are followed, the ATS must also establish adequate 
oversight procedures.\706\ Furthermore, all ATSs are required to 
preserve certain records pursuant to Rule 303(a)(1).\707\ However, 
neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently 
require that an ATS have in writing and preserve their safeguards and 
procedures to protect subscribers' confidential trading information, or 
their related oversight procedures. Based on the experience of the 
Commission and its staff from periodic examinations or investigations 
of ATSs, the Commission preliminarily believes that ATSs--in 
particular, ATSs whose broker-dealer operators are large, multi-service 
broker-dealers--currently have and maintain in writing their safeguards 
and procedures to protect subscribers' confidential trading 
information, as well as the oversight procedures to ensure such 
safeguards and procedures are followed. Nevertheless, under the current 
regulatory environment for ATSs, absent specific questions in an 
examination by the Commission or its staff, the Commission is not able 
to determine the specific ATSs that currently have written safeguards 
and written procedures to protect subscribers' confidential trading 
information based on the disclosure requirements of current Form ATS.
---------------------------------------------------------------------------

    \705\ 17 CFR 242.301(b)(10).
    \706\ 17 CFR 242.301(b)(10).
    \707\ See supra Section X.
---------------------------------------------------------------------------

5. Current State of Competition Between NMS Stock ATSs and Registered 
National Securities Exchanges
    In the market for NMS stock execution services, NMS Stock ATSs not 
only compete with other NMS Stock ATSs, but they also compete with 
registered national securities exchanges. As noted previously, while 
registered national securities exchanges compete with NMS Stock ATSs 
for order flow, NMS Stock ATSs and registered national securities 
exchanges are subject to different regulatory regimes, including 
different obligations to disclose information about their trading 
operations and activities.\708\ For example, ATSs that operate pursuant 
to the exemption from the definition of ``exchange'' under Rule 3a1-
1(a)(2) must register as broker-dealers,\709\ and provide notice of 
their operations on Form ATS.\710\ This notice of operations is not 
approved or disapproved by the Commission. Form ATS requires ATSs to 
disclose only limited aspects of their operations, and ATSs are not 
required to publicly disclose Form ATS, which is ``deemed confidential 
when filed.'' \711\ In addition, ATSs need not publicly disclose 
changes to their operations and trading functionality because 
amendments to Form ATS are not publicly disclosed.\712\ Some market 
participants therefore have limited access to information about NMS 
Stock ATSs, including information related to the types of subscribers, 
means of access, order types, market data, and procedures governing the 
interaction and execution of orders on the NMS Stock ATS. On the other 
hand, national securities exchanges, with which NMS Stock ATSs compete 
for order flow, must register with the Commission on Form 1, must file 
proposed rule changes with the Commission under Section 19(b) of the 
Exchange Act, and are SROs. The proposed rule changes of national 
securities exchanges must be made available for public comment,\713\ 
and in general, these proposed rule changes publicly disclose, among 
other things, details relating to the exchange's operations, 
procedures, and fees. National securities exchanges and other SROs also 
have regulatory obligations, such as enforcing their rules and the 
federal securities laws with respect to their members, which do not 
apply to market participants such as ATSs.\714\
---------------------------------------------------------------------------

    \708\ See supra Section I (discussing the different mix of 
obligations and benefits applicable to ATSs and registered national 
securities exchanges).
    \709\ See 17 CFR 242.301(b)(1).
    \710\ See 17 CFR 242.301(b)(2).
    \711\ See 17 CFR 242.301(b)(2)(vii).
    \712\ Id.
    \713\ See 15 U.S.C. 78s(b)(1).
    \714\ See, e.g., Section 19(b) of the Exchange Act, 15 U.S.C. 
78s(b)(1), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    While national securities exchanges have more regulatory burdens 
than NMS Stock ATSs, they also enjoy certain unique benefits that are 
not afforded to NMS Stock ATSs. While national securities exchanges are 
SROs, and are thus subject to surveillance and oversight by the 
Commission, they can still establish norms regarding conduct, trading, 
and fee structures for external access. ATSs on the other hand are 
regulated as broker-dealers, and must comply with the rules of FINRA, 
which is the SRO to which all ATSs currently belong. Trading venues 
that elect to register as national securities exchanges may gain added 
prestige by establishing

[[Page 81112]]

listing standards for their securities. Additionally, national 
securities exchanges can be direct participants in the NMS plans, such 
as the ITS, the CTA Plan, Consolidated Quotation System, and the OTC/
UTP Plan. Direct participation in these systems may provide a higher 
degree of transparency and execution opportunity than on NMS Stock 
ATSs. Furthermore, national securities exchanges are entitled to share 
in market data revenue generated by the CTA \715\ and enjoy limited 
immunity from private liability with respect to their regulatory 
functions.
---------------------------------------------------------------------------

    \715\ See Regulation ATS Adopting Release, supra note 7, at 
70880, 70902-70903 (discussing generally some of the obligations and 
benefits of registering as a national securities exchange).
---------------------------------------------------------------------------

    Since the adoption of Regulation NMS in 2005, the market for NMS 
stock execution services has become more and more fragmented and 
competitive. Currently there are 11 registered national securities 
exchanges that effect transactions in NMS stocks, namely, NYSE MKT LLC 
(formerly NYSE AMEX and the American Stock Exchange), BATS Exchange, 
Inc. (``BATS-Z Exchange''), BATS Y- Exchange, Inc. (``BATS-Y 
Exchange'') (``BATS-Z Exchange and BATS-Y Exchange, collectively ``the 
BATS Exchanges''), NASDAQ OMX BX, Inc. (formerly the Boston Stock 
Exchange), Chicago Stock Exchange, Inc., EDGA Exchange, Inc. 
(``EDGA''), EDGX Exchange, Inc. (``EDGX''), The Nasdaq Stock Market LLC 
(``Nasdaq''), New York Stock Exchange LLC (``NYSE''), NYSE Arca, Inc. 
(``NYSE Arca''), and NASDAQ OMX PHLX, Inc. (formerly Philadelphia Stock 
Exchange).\716\
---------------------------------------------------------------------------

    \716\ As noted above, National Stock Exchange, Inc. ceased 
trading on its system as of the close of business on May 30, 2014. 
See supra note 118.
---------------------------------------------------------------------------

    Several of these national securities exchanges (NYSE Arca, Nasdaq, 
BATS Z-Exchange, EDGA and EDGX) previously operated as ECNs or acquired 
ECNs as part of their trading platforms.\717\ A reason why an ECN might 
want to register as a national securities exchange is so that it can 
participate in and earn market data fees from U.S. tape plans, reduce 
clearing costs and operate a primary listings business.\718\
---------------------------------------------------------------------------

    \717\ See supra note 685 and accompanying text.
    \718\ See BATS Global Markets, Inc., Amendment to Form S-1 
Registration Statement, http://www.sec.gov/Archives/edgar/data/1519917/000119312512125661/d179347ds1a.htm.
---------------------------------------------------------------------------

    Over the past decade, with the increase in fragmentation in the 
market for execution services, there has been a shift in the market 
share of trading volume in NMS stocks across trading venues. For 
example, there has been a decline in market share of trading volume for 
exchange-listed stocks of the two traditionally dominant trading 
venues, NYSE and Nasdaq. The market share of the NYSE in NYSE-listed 
stocks fell dramatically from approximately 80% in 2005 to 20% in 2013, 
and for Nasdaq-listed stocks, Nasdaq's market share fell by 
approximately half, from 50% in 2005 to 25% in 2013.\719\ Over the same 
time period, there has been an increase in market share on other newer 
national securities exchanges such as NYSE Arca, BATS-Z, BATS-Y, EDGA 
and EDGX, and an increase in the market share of off-exchange trading, 
which includes both internalization by dealers and trading on NMS Stock 
ATSs.\720\ As discussed above, there has also been an increase in the 
number of NMS Stock ATSs that operate as dark pools, and the market 
share for these NMS Stock ATSs has increased.\721\ Thus, greater 
fragmentation in the market for NMS stock execution services over the 
past decade has resulted in trading volume being executed on different 
venues, some of which include NMS Stock ATSs, particularly NMS Stock 
ATSs that operate as dark pools.
---------------------------------------------------------------------------

    \719\ See Angel, James, Lawrence Harris, and Chester Spatt 
(2013), ``Equity Trading in the 21st Century: An Update,'' working 
paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1584026.
    \720\ See id.
    \721\ See supra Section XIII.B.1.
---------------------------------------------------------------------------

    As discussed above, NMS Stock ATSs face lower regulatory burdens 
than national securities exchanges. Because national securities 
exchanges are SROs, they are subject to certain regulatory obligations, 
such as enforcing their own rules and the federal securities laws with 
respect to their members. NMS Stock ATSs do not have such oversight and 
enforcement responsibilities.\722\ The Commission recognizes that the 
growth in the number of NMS Stock ATSs could be driven by these less 
stringent regulatory obligations.
---------------------------------------------------------------------------

    \722\ See supra note 714.
---------------------------------------------------------------------------

6. Competition Among NMS Stock ATSs
    NMS Stock ATSs also compete amongst each other in a niche in the 
market for NMS stock execution services. The rise in the number of NMS 
Stock ATSs has not only affected competition between national 
securities exchanges and ATSs for order flow of NMS stocks, it has also 
impacted competition among NMS Stock ATSs. Table 1 depicts the market 
share of total dollar volume for NMS stocks, and the total share volume 
for NMS stocks for individual ATSs, based on data collected from ATSs 
pursuant to FINRA Rule 4552 for 13 weeks of trading from late March 
2015 to late June 2015. Even though there are many NMS Stock ATSs, much 
of the NMS stock dollar volume on ATSs is transacted by only a handful 
of venues. Table 1 shows that the top eight NMS Stock ATSs ranked by 
dollar volume accounted for 61.1% of total dollar volume transacted on 
ATSs and 58.9% of total share volume transacted on ATSs from late March 
2015 to late June 2015.
BILLING CODE 8011-01-P

[[Page 81113]]

[GRAPHIC] [TIFF OMITTED] TP28DE15.000

Table 1--NMS Stock ATSs Ranked by Dollar Trading Volume

(March 30, 2015 to June 26, 2015)

    This table shows the 38 ATSs that effected transactions in NMS 
stocks from March 30, 2015 to June 26, 2015, ranked in descending order 
by dollar volume transacted. ATS data is reported weekly, and these 
dates approximately correspond to the second quarter of 2015. Dollar 
volume transacted on an ATS is calculated by multiplying the share 
volume for a given NMS stock on the ATS in a given week by the average 
trade price for that week. Dollar volume for each NMS stock is then 
aggregated across all NMS stocks that traded on the given ATS in that 
week. Also reported in this table is the number of trades, share 
volume, each NMS Stock ATS's market share of all NMS Stock ATS dollar 
volume and NMS Stock ATS share volume in that quarter.
    Table 2, which is based on data collected from NMS Stock ATSs 
pursuant to FINRA Rule 4552 for 13 weeks of trading from late March 
2015 to late June 2015, shows the average trade size, which is share 
volume divided by the number of trades on each of the NMS Stock ATSs. 
The table reveals marked differences in the average trade size of 
transactions executed on the various NMS Stock ATSs. Six NMS Stock ATSs 
had average trade sizes in excess of 10,000 shares. This suggests that 
some NMS Stock ATSs may receive large block orders and execute large 
trades.\723\ One of the

[[Page 81114]]

advantages for market participants of trading on block crossing 
networks is the ability to execute large block orders while minimizing 
the movement of prices against their trading interest.\724\
---------------------------------------------------------------------------

    \723\ For purposes of this analysis we considered block orders 
as orders of more than 10,000 shares, which is the traditional 
definition for block orders. See supra note 126.
    \724\ See supra notes 124-125 and accompanying text.
---------------------------------------------------------------------------

    While these NMS Stock ATSs on average execute large size trades, 
the combined market share of these NMS Stock ATSs is only 7.8% when 
measured in dollar volume, and 3.7% when measured in share volume. The 
vast majority of NMS Stock ATSs have average trade sizes between 150 
and 450 shares. The two NMS Stock ATSs with the highest market shares 
(measured either in dollar volume or share volume) have average trade 
sizes of 181 and 157 shares, respectively.
    Though NMS Stock ATSs compete with each other in a niche in the 
market for NMS stock execution services, the trade sizes in Table 2 
actually suggest that this niche market may not be very different from 
the market as a whole. The average trade size on NMS Stock ATSs is 214 
shares, which is not significantly different from the average trade 
size of 181 shares on registered national securities exchanges.\725\ 
Thus, on average, the trade size for executions on NMS Stock ATSs and 
national securities exchanges appears similar.
---------------------------------------------------------------------------

    \725\ These results are consistent with prior findings that 
average trade sizes on ``lit'' national securities exchanges are 
similar to those taking place on ``dark ATSs.'' See Tuttle: ATS 
Trading in NMS Stocks, supra note 126. Unlike ``lit'' national 
securities exchanges, dark ATSs do not publicly disseminate top of 
the limit-order book information. See id. See also supra note 123 
and accompanying text.
[GRAPHIC] [TIFF OMITTED] TP28DE15.001


[[Page 81115]]



Table 2: NMS Stock ATSs Ranked by Average Trade Size

(March 30, 2015 to June 26, 2015)

    This table shows 38 ATSs that effected transactions in NMS stocks 
from March 30, 2015 to June 26, 2015, ranked in descending order by 
average trade size. ATS data is reported weekly, and these dates 
correspond approximately to the second quarter of 2015. Also reported 
in this table is the raw number of trades, share volume, dollar volume, 
and each NMS Stock ATS's market share of all NMS Stock ATS dollar 
volume and NMS Stock ATS share volume. Dollar volume transacted on an 
ATS is calculated by multiplying the share volume for a given NMS stock 
on the ATS in a given week by the average trade price for that week. 
Dollar volume for each NMS stock is then aggregated across all NMS 
stocks that traded on the given ATS in that week.
    While many NMS Stock ATSs operating today are similar with respect 
to the limited transparency they provide with respect to their trading 
model, the Commission understands that the services offered vary 
significantly across NMS Stock ATSs. Some NMS Stock ATSs offer mid-
point matching services exclusively while others may have more complex 
matching algorithms. Some other NMS Stock ATSs offer preferential 
treatment in execution priority to some groups of subscribers, but not 
others, and some NMS Stock ATSs may allow subscribers to avoid trading 
with specific counterparties. Additionally, order types and their 
characteristics can also vary significantly across NMS Stock ATSs, 
including with respect to how particular order types interact with 
other order types, which could affect execution priorities. Even though 
an NMS Stock ATS might not be privy to detailed information about the 
operations of other NMS Stock ATSs, it may be able to garner general 
information about the differential services offered by its competitors 
through Web sites and forums,\726\ enabling it to modify its products 
and services to better compete within the market for NMS stock 
execution services. Thus, while an NMS Stock ATS may currently make 
available certain information about its products and services in an 
attempt to enable market participants to differentiate the ATS's 
products and services from those of its competitors, an NMS Stock ATS 
may not be incented to fully reveal how orders interact, match and 
execute on its platform, because revealing such information may 
adversely impact the ATS's position within the market by also informing 
its competitors.
---------------------------------------------------------------------------

    \726\ Furthermore, a broker-dealer that operates an ATS may also 
be a subscriber to one or more ATSs that are owned or operated by 
other broker-dealers, and in this capacity, may obtain information 
about how such unaffiliated ATS(s) operate. For example, the broker-
dealer operator of an ATS that is a subscriber to an unaffiliated 
ATS may obtain information about order types and priority rules of 
the unaffiliated ATS.
---------------------------------------------------------------------------

7. Competition Between Broker-Dealers That Operate NMS Stock ATSs and 
Broker-Dealers That Do Not Operate NMS Stock ATSs
    Competition for NMS stock order flow not only exists between 
national securities exchanges and NMS Stock ATSs and among NMS Stock 
ATSs, but also exists between the broker-dealers that operate NMS Stock 
ATSs and those broker-dealer operators that do not operate NMS Stock 
ATSs. As discussed above, most ATSs that currently transact in NMS 
stocks are operated by multi-service broker-dealers that engage in 
significant brokerage and dealing activities in addition to their ATS 
operations.\727\ These multi-service broker-dealers operate one or more 
NMS Stock ATS as a complement to the broker-dealer's other service 
lines, often using the ATS(s) as an opportunity to execute customer 
orders ``in house'' before seeking contra-side interest at outside 
execution venues. They may also execute orders in NMS stocks internally 
on non-ATS trading centers by trading as principal against such orders, 
or crossing orders as agent in a riskless principal capacity, before 
routing the orders to an ATS that they operate.
---------------------------------------------------------------------------

    \727\ See supra Section III.B.
---------------------------------------------------------------------------

    The current competitive environment in which NMS Stock ATSs operate 
suggests that broker-dealers who operate their own NMS Stock ATS(s) may 
have certain trading advantages relative to broker-dealers that do not 
operate their own NMS Stock ATS. Broker-dealer owned NMS Stock ATSs may 
provide their business units or affiliates, that are also subscribers 
to the NMS Stock ATS, access to certain services, which may result in 
trading advantages, such as providing faster access to the ATS or 
priority in executions over other subscribers, such as broker-dealers 
that do not have their own ATS platform and may route their orders to 
these ATSs.
8. Effect of NMS Stock ATSs on the Current Market for NMS Stock 
Execution Services
    As discussed above, the current market for NMS stock execution 
services consists of competition for order flow among national 
securities exchanges, NMS Stock ATSs, and broker-dealers who operate or 
control non-ATS trading centers.\728\ This section specifically 
discusses the impact that this current market for NMS stock execution 
services has on trading costs to market participants; the process by 
which the price of NMS stocks are determined in the market (``price 
discovery''); and market efficiency.
---------------------------------------------------------------------------

    \728\ See supra Section XIII.A. See also supra note 123 
(describing dark pools that are not ATSs) and note 387 (describing 
non-ATS trading centers).
---------------------------------------------------------------------------

a. Trading Costs
    Since the adoption of Regulation ATS in 1998 and the implementation 
of Regulation NMS in 2005, trading costs have, on average, declined 
significantly in the U.S. Institutional trading costs--particularly for 
large capitalization stocks--are amongst the lowest in the world.\729\ 
Since 1998, share and dollar trading volume, has generally increased, 
and with the exception of the financial crisis, bid-ask spreads (both 
quoted and effective spreads) have narrowed significantly.\730\ Some 
research has suggested that these lower trading costs can, in part, be 
driven by the rising fragmentation of trading volume and competition 
for order flow, through the proliferation of new trading venues such as 
NMS Stock ATSs.\731\
---------------------------------------------------------------------------

    \729\ See ``View Point: US Equity Market Structure: An Investor 
Perspective,'' BlackRock, April 2014, https://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf; and Angel, supra note 719.
    \730\ See BlackRock, supra note 729; and Angel, supra note 719.
    \731\ See Foucault, Thierry and A.J. Menkveld, 2008, 
``Competition for Order Flow and Smart Order Routing Systems,'' 
Journal of Finance 63, 19-58; O'Hara, M. and M. Ye, 2011, ``Is 
Market Fragmentation Harming Market Quality?'' Journal of Financial 
Economics 100, 459-74; and Colliard, J.E. and Thierry Foucault 
(2012), ``Trading Fees and Efficiency in Limit Order Markets,'' 
Review of Financial Studies 25, 3389-421.
---------------------------------------------------------------------------

    NMS Stock ATSs provide an environment whereby certain market 
participants can trade at low costs relative to national securities 
exchanges. For instance, if market participants submit to a national 
securities exchange a block order or a large ``parent'' order shredded 
into smaller ``child'' orders, they may experience ``price impact'' 
when others observe their trading and infer the presence of a large 
order. That is, the price at which these child orders execute may get 
subsequently worse from the time of the initial order submission to the 
time of the final execution of the order. Thus, when working these 
child orders, the order originator may seek to keep their executions 
``quiet'' to minimize adverse price moves that may otherwise occur as 
other market participants infer that order originator is an 
institutional

[[Page 81116]]

investor that is a large buyer or seller. As such, trading on NMS Stock 
ATSs may provide a useful tool whereby institutional investors may be 
able to reduce the extent to which their own trading signals additional 
trading intentions and obtain enhanced execution quality for their 
orders.
    The current market for NMS stock execution services--which includes 
NMS Stock ATSs--provides value to market participants. If all NMS Stock 
ATSs were to cease operations, market participants may incur costs 
associated with not being able to find an adequate trading venue that 
offers benefits similar to those that NMS Stock ATSs provide. For 
example, certain market participants may be unable to find a trading 
center that adequately minimizes the revelation of their trading 
interest. Therefore, some of the trades by these market participants, 
which would have been executed on NMS Stock ATSs, may no longer be 
executed at all if NMS Stock ATSs cease operations. Even though NMS 
Stock ATSs provide value to some market participants by allowing them 
to trade on a venue that mitigates the signaling of information 
regarding their trading interest while keeping their trading costs at a 
low level, NMS Stock ATSs are characterized by a lack of transparency 
regarding their operations and the activities of their broker-dealer 
operators and the broker-dealer operator's affiliates. Currently, 
disclosures on Form ATS are not required to be made public, and even 
when an NMS Stock ATS voluntarily discloses its Form ATS, the 
information provided tends to be limited. The Commission has also 
observed that NMS Stock ATSs vary with respect to the depth and extent 
of their disclosures on Form ATS, including basic aspects of their 
operations. This heterogeneity in terms of the level of disclosure 
pertaining to NMS Stock ATS operations has resulted in certain costs 
for market participants, in that currently a market participant has to 
expend some effort searching for a trading venue that would serve its 
investing or trading objectives. A by-product of these search costs for 
some market participants is uncertainty pertaining to how their orders 
will be handled. Because there is no current requirement for NMS Stock 
ATSs to disclose information about their operations to the public, some 
subscribers to NMS Stock ATSs--particularly subscribers to those NMS 
Stock ATSs that have not made their Form ATS public--may not fully know 
how their orders are handled. Furthermore, for a specific NMS Stock 
ATS, some subscribers may have been provided more information regarding 
how their orders will interact, match, and execute on the NMS Stock 
ATS, exacerbating this uncertainty.
b. Price Discovery
    The current market for NMS stock execution services has resulted in 
the fragmentation of trading volume. While this fragmentation--which 
has in part been due to the rise in NMS Stock ATSs--has been a factor 
in currently providing low trading costs for market participants,\732\ 
the contributions that this current market for NMS stock execution 
services provides in terms of price discovery has been mixed. Some 
academic studies imply that while national securities exchanges and NMS 
Stock ATSs are regulated differently, their coexistence in the current 
market has had a positive contribution to price discovery, as it has 
led to more aggressive competition among market participants in 
providing liquidity, which in turn has improved price discovery.\733\ 
Other academic studies have suggested that because some NMS Stock ATSs 
are crossing networks and often derive their prices from national 
securities exchanges, price impact costs that result from trading on a 
national securities exchange harm prices on NMS Stock ATSs, resulting 
in less trading and harming price discovery.\734\
---------------------------------------------------------------------------

    \732\ See supra note 731.
    \733\ See Boulatov, Alex, and T.J. George, 2013, ``Hidden and 
Displayed Liquidity in Securities Markets with Informed Liquidity 
Providers,'' Review of Financial Studies 26, 2095-2137.
    \734\ See Ye, Mao, 2011, ``A Glimpse into the Dark: Price 
Formation, Transaction Cost and Market Share of the Crossing 
Network,'' working paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1521494.
---------------------------------------------------------------------------

    Some academic studies have also suggested that the coexistence of 
national securities exchanges and NMS Stock ATSs has led to market 
segmentation, i.e. to the extent that certain subscribers of NMS Stock 
ATSs have information regarding how orders will interact, match, and 
execute on an NMS Stock ATS, these subscribers may be able to make more 
informed decisions about where to route their orders, and, therefore, 
such subscribers may congregate and trade on either NMS Stock ATSs or 
national securities exchanges based on that information. These academic 
studies further suggest that this market segmentation, whereby certain 
subscribers of NMS Stock ATSs have information regarding how orders 
will interact, match and execute and, therefore, trade on NMS Stock 
ATSs or national securities exchanges, can improve price 
discovery.\735\
---------------------------------------------------------------------------

    \735\ See Zhu, Haoxiang, 2014, ``Do Dark Pools Harm Price 
Discovery?'' Review of Financial Studies 27, 747-789. This academic 
study specifically examines dark pools.
---------------------------------------------------------------------------

    The theory that market segmentation of market participants leads to 
price discovery relies on the assumption that because trade executions 
on some NMS Stock ATSs are determined by matching orders, orders of 
informed market participants are more likely to cluster on one side of 
the market (either the buy-side or the sell-side).\736\ For instance, 
if informed market participants believe that a security is undervalued, 
they will be more likely to submit a buy-order; and vice-versa if they 
believe a security is overvalued. This means that if these informed 
market participants trade on an NMS Stock ATS, their trading interest 
will likely cluster towards one side of the market and there will not 
be enough orders to take the opposite side of their trades. As a 
result, some orders will not be matched and there would be low rates of 
execution on NMS Stock ATSs. In contrast, orders by uninformed market 
participants are less likely to be correlated with one another because 
the reasons for their trading are somewhat idiosyncratic to the market 
participant.\737\ These orders by uninformed market participants are, 
therefore, less likely to cluster on one side of the market, because 
trades by uninformed market participants are not grounded on 
fundamental information about the stock. As such, the orders from 
uniformed market participants will likely have higher rates of 
execution on NMS Stock ATSs relative to rates of executions for 
informed participants.\738\ Accordingly, this academic literature 
predicts that the set of market participants entering orders on 
national securities exchanges will contain a proportionately higher 
level of informed market participants.\739\ This segmentation of market 
participants on NMS Stock ATSs and national securities exchanges 
potentially could result in informed market participants trading on 
national securities exchanges, and uninformed market participants 
trading on NMS Stock ATSs.\740\ Because

[[Page 81117]]

informed market participants have better knowledge about the value of a 
security than uninformed market participants, this segmentation can 
improve price discovery on national securities exchanges.\741\
---------------------------------------------------------------------------

    \736\ See id.
    \737\ Uninformed market participants trade for non-informational 
reasons. In some cases, they are termed ``noise traders,'' since 
their trades are based on their beliefs and sentiments, and are not 
grounded on fundamental information. See Vishwanath, Ramanna. and 
Chandrasekhar Krishnamurti, 2009, ``Investment Management: A Modern 
Guide to Security Analysis and Stock Selection,'' Springer 
Publishing.
    \738\ See supra note 735.
    \739\ See id.
    \740\ It should be noted that this academic literature posits 
one theory regarding how the coexistence of national securities 
exchanges and NMS Stock ATSs results in segmented trading of 
informed and uninformed market participants. See supra note 735. 
Contrary to this theory regarding how market segmentation of 
national securities exchanges and NMS Stock ATSs can affect price 
discovery, a motivation for informed market participants to trade on 
NMS Stock ATSs is to minimize the price impact of large trades. 
Thus, it could be the case that the decision by informed market 
participants of where to trade is reduced to whether the value of 
minimizing the price impact of their trades outweighs the heightened 
execution risk (due to the difficulty in finding a counterparty to 
take the opposite side of the trade, perhaps because a market 
participant places a large order) they might incur if they trade on 
NMS Stock ATSs See supra note 734.
    \741\ See Zhu, supra note 736; Comerton-Forde, Carole and T.J. 
Putnins, 2015, ``Dark Trading and Price Discovery,'' working paper, 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183392. Both 
these studies specifically examine dark pools.
---------------------------------------------------------------------------

    Several academic studies suggest that the presence of NMS Stock 
ATSs in the current trading environment deteriorates price discovery 
\742\ and liquidity.\743\ When trading, informed market participants 
often balance two types of costs, namely price impact costs and 
execution costs. On a national securities exchange, an informed market 
participant's order experiences lower execution risk, but because of 
price impact, each order is subsequently executed at a worse 
price.\744\ On an NMS Stock ATS, price impact costs are smaller due to 
there being less informational dissemination than on national 
securities exchanges, however, the probability of execution decreases 
as order size increases, due to the increased difficulty in finding a 
counterparty to take the opposite side of a large trade.\745\ Because 
trading on a national securities exchange generates price impact, the 
cost associated with this price impact also could affect a market 
participant's profit on trades executed on an NMS Stock ATS. The reason 
for this is that NMS Stock ATSs often match orders at prices derived 
from national securities exchanges, and if trading on these national 
securities exchanges generates worse prices due to price impact, this 
could therefore spill over and affect a market participant's profit on 
trades executed on the NMS Stock ATS. This spillover could result in 
informed market participants trading less aggressively, which could in 
turn reduce price discovery.\746\ Finally, while low levels of trading 
on NMS Stock ATSs are not harmful, price discovery is harmed for high 
levels of trading on NMS Stock ATSs (i.e., when trading on NMS Stock 
ATSs in a given NMS stock exceeds approximately 10% of dollar 
volume).\747\ This implies that when most orders are filled on NMS 
Stock ATSs, market participants may withdraw displayed quotes because 
of the reduced likelihood of those orders being filled.\748\
---------------------------------------------------------------------------

    \742\ See Ye, Mao, 2011, ``A Glimpse into the Dark: Price 
Formation, Transaction Cost and Market Share of the Crossing 
Network,'' working paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1521494; Degryse, Hans, Frank de Jong and 
Vincent van Kervel, 2015, ``The Impact of Dark Trading and Visible 
Fragmentation on Market Quality,'' Review of Finance 19, 1587-1622. 
Both these studies specifically examine dark pools.
    \743\ See Zhu, supra note 736.
    \744\ See Ye, supra note 742.
    \745\ See Ye, supra note 742.
    \746\ See Ye, supra note 742 (for theoretical work on this 
topic). See also Comerton-Forde and Putnins, supra note 741, for 
empirical work on this topic. Specifically, using Australian data, 
the latter paper finds that the migration of order flow into dark 
pools removes valuable information from the price formation process, 
and leads to increased adverse selection, larger bid-ask spreads 
(lower liquidity) and larger price impacts on the exchange (lower 
market quality). Both of these studies specifically examine dark 
pools.
    \747\ See also Comerton-Forde and Putnins, supra note 741.
    \748\ See CFA Institute, 2012, ``Dark Pools, Internalization, 
and Equity Market Quality,'' http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2012.n5.1. This study specifically examines dark pools.
---------------------------------------------------------------------------

    Another element that may affect market quality is order 
internalization by broker-dealers. Academic literature has previously 
proposed theoretical models where broker-dealer operators have an 
incentive to internalize uninformed orders, by trading as principal 
against such orders or crossing orders as agent in a riskless principal 
capacity, before routing the orders to their respective ATSs.\749\ The 
literature has also argued that internalization of order flow reduces 
market depth and price informativeness.\750\ According to this 
literature, the internalization of order flow by broker-dealers, some 
of whom operate NMS Stock ATSs, is associated with wider spreads 
(quoted, effective, and realized), higher price impact per trade, and 
increased volatility of trades on the registered national securities 
exchanges, which translates into an increased cost for market 
participants, where market participants pay approximately $3.9 million 
more per security per year.\751\ In the current operational environment 
of NMS Stock ATSs, based on the Commission's experience, subscribers' 
orders or other trading interest could be removed from the broker-
dealer's NMS Stock ATS and routed to, among other destinations, another 
trading center operated by the broker-dealer operator for 
internalization. Thus, the fact that some broker-dealers operate their 
own NMS Stock ATS, and yet internalize some order flow rather than 
executing it on their own NMS Stock ATS, may have a deleterious effect 
on market quality.
---------------------------------------------------------------------------

    \749\ See Chordia, Tarun and Avanidhar Subrahmanyam, 1995, 
``Market making, the tick size, and payment-for-order flow: Theory 
and evidence,'' Journal of Business 68, 543-75; Easley, Kiefer and 
O'Hara, 1996, ``Cream-skimming or profit-sharing? The curious role 
of purchased order flow,'' Journal of Finance 51, 811-33.
    \750\ See Chakravarty, Sugato and Asani Sarkar, 2002, ``A model 
of broker's trading, with applications to order flow 
internalization,'' Review of Financial Economics 11, 19-36.
    \751\ See Weaver, Daniel G., 2014, ``The Trade-At Rule, 
Internalization, and Market Quality,'' working paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1846470.
---------------------------------------------------------------------------

c. Market Efficiency
    Currently, the coexistence of national securities exchanges and NMS 
Stock ATSs seems to have beneficial effects on market efficiency. One 
academic study suggests that while not all trades that execute on NMS 
Stock ATSs are large block trades, those that are have been seen to be 
beneficial to market efficiency.\752\ If NMS Stock ATSs were not a 
viable trading venue for market participants, market participants might 
not execute large orders at all because of the price impact costs of 
executing on a national securities exchange. Therefore, the ability for 
market participants to execute large trades on NMS Stock ATSs generates 
liquidity. The same study also suggests that small trades that execute 
on NMS Stock ATSs are beneficial in that they also generate market 
efficiency.\753\
---------------------------------------------------------------------------

    \752\ See Comerton-Forde and Putnins, supra note 741.
    \753\ See id.
---------------------------------------------------------------------------

C. Economic Effects and Effects on Efficiency, Competition, and Capital 
Formation

    The Commission has considered the economic effects of the proposed 
amendments to Rule 3a1-1(a) and Regulation ATS. This section provides 
an overview of the broad economic considerations relevant to the 
proposed amendments to Rule 3a1-1(a) and Regulation ATS, and the 
economic effects, including the costs, benefits, and the effects on 
efficiency, competition, and capital formation. Additional economic 
effects, including benefits and costs related to specific requirements 
of the proposed amendments to Rule 3a1-1(a) and Regulation ATS, are 
also discussed.
    The proposed amendments to Rule 3a1-1(a) and Regulation ATS \754\ 
are designed to generate greater transparency about the operations of 
NMS Stock ATSs and the activities of their broker-dealer operators and 
their

[[Page 81118]]

affiliates. By requiring NMS Stock ATSs to provide detailed, public 
disclosures about their operations and the activities of their broker-
dealer operators and their broker-dealer operators' affiliates, the 
Commission preliminarily believes that the proposal would reduce the 
discrepancy in information that different market participants receive 
about NMS Stock ATS operations and provide market participants--
particularly those that have access to less information about NMS Stock 
ATS operations--with more information about the means by which orders 
and trading interest interact, match, and execute on NMS Stock ATSs. 
The Commission preliminarily believes that the proposal would help 
market participants make better-informed decisions about where to route 
their orders in order to achieve their trading or investment 
objectives, improve the efficiency of capital allocation, and enhance 
execution quality.
---------------------------------------------------------------------------

    \754\ See supra Section IV.
---------------------------------------------------------------------------

    The Commission further understands that the proposed amendments to 
Regulation ATS may generate some uncertainty for NMS Stock ATSs in 
that, under the proposal, the Commission would declare a Form ATS-N 
effective or ineffective (which is not currently the case with respect 
to Form ATS), and this may act as a potential deterrent for ATSs 
wishing to transact NMS stocks, or legacy NMS Stock ATSs that would be 
required to file Form ATS-N. Moreover, the proposed amendments to Rule 
3a1-1(a) and Regulation ATS could be costly, because NMS Stock ATSs 
would have to disclose detailed information about their operations and 
the activities of their broker-dealer operators and their affiliates. 
Together, these could harm the competitive dynamics in the market for 
NMS stock execution services, which includes competition between 
national securities exchanges and NMS Stock ATSs, among NMS Stock ATSs 
themselves, and between broker-dealers that operate NMS Stock ATSs and 
those that do not.\755\ Increased costs associated with disclosure 
requirements for NMS Stock ATSs could result in some NMS Stock ATSs 
exiting the market or could create a disincentive for potential NMS 
Stock ATSs to enter the market. However, in spite of these costs, and 
as discussed in more detail below, the Commission preliminarily 
believes that the NMS Stock ATSs that remain in the market may 
propagate greater interaction between buyers and sellers who trade on 
these venues, fostering not only trading between one and another, but 
also facilitating the price discovery process and capital formation. 
The consistent set of information that is proposed to be disclosed in 
Form ATS-N may impact how market participants react in terms of their 
trading, which may improve market efficiency.\756\
---------------------------------------------------------------------------

    \755\ See infra Section XIII.C.2.
    \756\ See id.
---------------------------------------------------------------------------

    Moreover, the Commission notes that increased transparency 
regarding the operations of NMS Stock ATSs may impact competition 
between broker-dealers that operate NMS Stock ATSs and broker-dealers 
who trade NMS stocks but do not operate an NMS Stock ATS. Because 
broker-dealers who transact in NMS stocks but do not operate ATSs are 
not subject to the proposed operational transparency requirements, 
these broker-dealers may be at a competitive advantage and attract and 
internalize order flow that would otherwise be entered and executed on 
NMS Stock ATSs. Furthermore, greater operational transparency of NMS 
Stock ATSs could also impact competition between NMS Stock ATSs and 
national securities exchanges, resulting in a larger amount of order 
flow being executed on national securities exchanges.
    Further, the Commission preliminarily believes that the proposed 
amendments to Rule 301(b)(10) and 303(a)(1) that would require ATSs to 
establish and preserve written safeguards and written procedures to 
protect subscribers' confidential trading information, as well as the 
oversight procedures to ensure such safeguards and procedures are 
followed should strengthen the effectiveness of those safeguards and 
procedures and better enable an NMS Stock ATS to protect confidential 
subscriber trading information and implement and monitor the adequacy 
of, and the ATS's compliance with, its safeguards and procedures.\757\ 
The Commission also preliminarily believes that requiring ATSs to adopt 
written safeguards and written procedures will benefit the Commission 
by helping it better understand, monitor, and evaluate how each ATS 
protects subscribers' confidential trading information from 
unauthorized disclosure and access.\758\ The Commission also expects 
that this proposed requirement will help oversight by the SRO of which 
the NMS Stock ATS's broker-dealer operator is a member.
---------------------------------------------------------------------------

    \757\ See supra Section IX.
    \758\ See id.
---------------------------------------------------------------------------

    The Commission has attempted, where possible, to quantify the 
benefits and costs anticipated by the proposed amendments to Rule 3a1-
1(a) and Regulation ATS. The Commission notes, however, that many of 
the costs and benefits of the proposed amendments are difficult to 
quantify with any degree of certainty. For instance, it is unclear how 
many NMS Stock ATSs might cease operations (or, less likely, switch to 
trading in a different class of securities) if they are required to 
publicly disclose information about their operations on proposed Form 
ATS-N. It is also unclear how many NMS Stock ATSs may decide to 
register as national securities exchanges, as some ECNs have in 
previous years, as a result of the proposed amendments to Rule 3a1-1(a) 
and Regulation ATS.\759\ Therefore, quantifying the effects that the 
expanded disclosure requirements would have on market liquidity and 
capital formation is difficult. As the decision for an NMS Stock ATS to 
continue operating or to exit the market depends on numerous factors, 
one of which being the extent to which its competitive advantage is 
driven by its matching methodology or other operational 
characteristics, the Commission is unable to fully determine the extent 
to which the proposal would affect this decision. Furthermore, the 
decision to exit is idiosyncratic to the NMS Stock ATS and the 
Commission cannot ascertain whether large or small ATSs will be more 
prone to leaving the market. Additionally, the Commission cannot 
estimate the fraction of order flow that would be routed to other NMS 
Stock ATSs or national securities exchanges if some ATSs ceased 
operations. In light of all of these limitations on available 
information, the Commission is unable to make reasonable assumptions 
regarding the number of NMS Stock ATSs that may cease operations and 
exit the market; the number of NMS Stock ATSs that may register as 
national securities exchanges; or the fraction of order flow that would 
be routed to other NMS Stock ATSs or national securities exchanges if 
some ATSs ceased operations. Given that the Commission is unable to 
make these assumptions, it is unable to quantify the effect of the 
proposed amendments to Rule 3a1-1(a) and Regulation ATS on trading 
volume on the NMS Stock ATS as well as quantify the effects on price 
discovery and market efficiency.
---------------------------------------------------------------------------

    \759\ See supra note 685 and accompanying text.
---------------------------------------------------------------------------

1. Costs and Benefits of Proposed Enhanced Filing Requirements
    As discussed above, the Commission is proposing to amend Rule 3a1-
1(a) and Regulation ATS to require ATSs that effect transactions in NMS 
stocks comply with the requirements of

[[Page 81119]]

proposed Rule 304 in order to qualify for exemption from the definition 
of ``exchange.'' \760\ The proposed amendments would require an NMS 
Stock ATS to file reports and amendments pursuant to proposed Rule 304, 
which includes the requirement to file proposed Form ATS-N, in lieu of 
current Form ATS, to disclose information about its operations and the 
activities of its broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

    \760\ See supra Section IV (discussing the proposed amendments). 
See also proposed Rules 3a1-1(a)(2) and (3), 300, 301, and 304.
---------------------------------------------------------------------------

    As noted above, an NMS Stock ATS may provide some subscribers 
access to certain trading information or services that it does not 
provide to others.\761\ For example, an NMS Stock ATS may offer certain 
order types or special fees or rebates to particular subscribers, which 
might result in those subscribers obtaining an advantage when trading 
on the ATS. The proposed amendments would require NMS Stock ATSs to 
describe any such differentiation of services or information among 
subscribers, which would include certain disclosures related to the 
operations of their broker-dealer operators. The Commission 
preliminarily believes that those disclosures would help market 
participants assess potential conflicts of interest that may adversely 
impact their trading on the NMS Stock ATS.
---------------------------------------------------------------------------

    \761\ See supra Section VII.B.10.
---------------------------------------------------------------------------

    Proposed Rule 304 would also provide a process by which the 
Commission would declare Form ATS-N filings effective or ineffective, 
and a process by which the Commission would review Form ATS-N 
Amendments and declare ineffective a Form ATS-N Amendment if it finds 
that such action is necessary or appropriate in the public interest, 
and is consistent with the protection of investors. The Commission is 
also proposing a process by which the Commission could suspend, limit, 
or revoke an NMS Stock ATS's exemption from the definition of an 
``exchange'' under Rule 3a1-1(a)(2).\762\ An NMS Stock ATS would not 
qualify for the exemption from the definition of ``exchange'' unless 
the NMS Stock ATS files Form ATS-N with the Commission and the 
Commission declares the Form ATS-N effective.\763\
---------------------------------------------------------------------------

    \762\ Pursuant to proposed Rule 304(b)(2), the Commission would 
publicly post on its Web site each: order of effectiveness of a Form 
ATS-N; order of ineffectiveness of a Form ATS-N; effective Form ATS-
N; filed Form ATS-N Amendment; order of ineffectiveness of a Form 
ATS-N Amendment; notice of cessation; and order suspending, 
limiting, or revoking the exemption from the definition of an 
``exchange'' pursuant to Rule 3a1-1(a)(2). Proposed Rule 304(b)(3) 
would also require an NMS Stock ATS that has a Web site to post on 
its Web site a direct URL hyperlink to the Commission's Web site 
that contains the documents enumerated in proposed Rule 304(b)(2). 
See supra Section IV.D.
    \763\ See supra Section IV.C.5.
---------------------------------------------------------------------------

a. Better Regulatory Oversight and Increased Investor Protection
    The Commission preliminarily believes that the proposed amendments 
to Rule 3a1-1(a) and Regulation ATS would result in better regulatory 
oversight of NMS Stock ATSs and increased investor protection. Form ATS 
discloses only limited aspects of an ATS's operations as compared to 
the information that would be provided on Form ATS-N by NMS Stock ATSs. 
Form ATS requires, for example, that an ATS provide information about: 
classes of subscribers and differences in access to the services 
offered by the ATS to different groups or classes of subscribers; 
securities the ATS expects to trade; any entity other than the ATS 
involved in its operations; the manner in which the system operates; 
how subscribers access the trading system; procedures governing order 
entry and execution; and trade reporting, clearance and settlement of 
trades on the ATS. On the other hand, Form ATS-N would require an NMS 
Stock ATS to disclose information about the manner of operations of the 
ATS, including: subscribers; hours of operation; types of orders; 
connectivity, order entry, and co-location procedures; segmentation of 
order flow and notice about segmentation; display of order and other 
trading interest; trading services, including matching methodologies, 
order interaction rules, and order handling and execution procedures; 
procedures governing suspension of trading or trading during a system 
disruption or malfunction; opening, closing, and after hours 
procedures; outbound routing services; fees; market data; trade 
reporting; clearance and settlement; order display and execution access 
(if applicable); fair access (if applicable); and market quality 
statistics published or provided to one or more subscribers.
    In addition, current Form ATS does not require an ATS to disclose 
information about the activities of the broker-dealer operator and the 
broker-dealer operator's affiliates in connection with the ATS whereas 
the enhanced disclosure requirements under proposed Form ATS-N would 
require an NMS Stock ATS to disclose information about the activities 
of its broker-dealer operator and the broker-dealer operator's 
affiliates that may give rise to potential conflicts of interest, 
including: their operation of non-ATS trading centers and other NMS 
Stock ATSs; products and services offered to subscribers; arrangements 
with unaffiliated trading centers; trading activities on the NMS Stock 
ATS; smart order router (or similar functionality) and algorithms used 
to send or receive orders or other trading interest to or from the ATS; 
personnel and third parties used to operate the NMS Stock ATS; 
differences in the availability of services, functionalities, or 
procedures; and safeguards and procedures to protect subscribers' 
confidential trading information. Accordingly, the Commission 
preliminarily believes that the enhanced disclosure requirements under 
proposed Form ATS-N would result in better regulatory oversight of NMS 
Stock ATSs and increased investor protection by providing the 
Commission, relevant SROs, and market participants with significantly 
more information with which to analyze and evaluate how orders are 
handled and executed on NMS Stock ATSs.
    The Commission is proposing that Form ATS-N and Form ATS-N 
Amendments be filed electronically in a text-searchable format. The 
Commission preliminarily believes that requiring Form ATS-N and Form 
ATS-N Amendments to be filed in a text-searchable format, coupled with 
the enhanced disclosure requirements under the proposal, will 
facilitate a more effective and thorough review and analysis of NMS 
Stock ATSs by regulators, which should yield greater insights into the 
operations of NMS Stock ATSs and the activities of their broker-dealer 
operators and their affiliates. For example, under the proposal, 
examiners at the Commission and the SRO of which an NMS Stock ATS is a 
member would be able to run automated processes to review information 
disclosed on filed Forms ATS-N and Form ATS-N Amendments in order to 
select NMS Stock ATSs for examination based on certain criteria for the 
examination. Additionally, examiners would be better able to assemble 
and review a larger pool of data regarding NMS Stock ATSs to better 
inform their examinations. Both such benefits could increase investor 
protection by improving the effectiveness and efficiency of the 
examination process.
    Furthermore, the Commission preliminarily believes that the 
proposed process of declaring a Form ATS-N effective or ineffective and 
the process to review and declare, if necessary, Form ATS-N Amendments 
ineffective would improve the quality of the information regulators 
receive from NMS Stock ATSs and increase the

[[Page 81120]]

protection of investors. The proposed effectiveness process for a Form 
ATS-N is designed to provide an opportunity for the Commission to 
review Form ATS-N filings before an NMS Stock ATS commences operations 
(in the case of new NMS Stock ATSs), or while it continues operations 
under its Form ATS filing (in the case of legacy NMS Stock ATSs). The 
Commission preliminarily believes that the proposed process would allow 
the Commission to evaluate the adequacy of NMS Stock ATSs' disclosures 
for compliance with the Form ATS-N requirements before declaring the 
Form ATS-N effective or ineffective. As a result, once the Commission 
has made an effectiveness or ineffectiveness determination, only an NMS 
Stock ATS for which a Form ATS-N has been declared effective would be 
allowed to transact in NMS stocks without registering as a national 
securities exchange.
    The Commission would make Form ATS-N Amendments public upon filing. 
As a result, a publicly disclosed Form ATS-N Amendment could contain 
potentially inaccurate or incomplete disclosures at the time it is 
posted on the Commission's Web page. Prior to the conclusion of its 
review of a Form ATS-N Amendment, the Commission would make the public 
aware of the fact that, though the amendment is posted on the 
Commission's Web site, it is still pending Commission review and could 
still be declared ineffective. The Commission preliminarily believes 
that this process would provide transparency to market participants 
about the operations of these ATSs and also provide market participants 
with information about forthcoming changes to the NMS Stock ATS while 
the Commission's review is pending.
    The Commission preliminarily believes that the proposed review and 
public disclosure process for a Form ATS-N and Form ATS-N Amendments 
would allow the Commission to better protect investors from potentially 
inaccurate or incomplete disclosures that could misinform market 
participants about the operations of an NMS Stock ATS or the activities 
of its broker-dealer operator, including how their orders may be 
handled and executed, and thereby impact market participants' decisions 
about where they should route their orders.
    If the Commission declares ineffective a Form ATS-N or Form ATS-N 
Amendment of an entity, that entity would have the opportunity to 
address deficiencies in the previously filed form by filing a new Form 
ATS-N or Form ATS-N Amendment. However, the Commission recognizes that 
an ineffectiveness declaration could impose costs on that entity--such 
as costs from having to cease operations, roll back a change in 
operations, or delay the start of operations--and could impose costs on 
the overall market for NMS stock execution services resulting from a 
potential reduction in competition or the removal of a sole provider of 
a niche service within the market. Furthermore, the removal of a sole 
provider of a niche service from the market could also impose costs on 
individual market participants, as they may have to subscribe to 
another NMS Stock ATS, or they may have to incur the cost of making 
changes to their SOR (or similar functionality) or algorithm in order 
to submit their orders for execution. However, NMS Stock ATSs and 
market participants would not incur these costs unless the Commission 
declares a Form ATS-N or a Form ATS-N Amendment ineffective. The 
Commission preliminarily believes that NMS Stock ATSs would be 
incentivized to comply with the requirements of Form ATS-N, as well as 
federal securities laws, including the other requirements of Regulation 
ATS, to avoid an ineffectiveness declaration, which produces benefits 
to the market. Therefore, the Commission preliminarily believes that 
there would be no undue burden imposed in connection with resubmitting 
Form ATS-N for these entities or from an ineffective declaration in 
general.
b. Implementation and Ongoing Costs
    The Commission understands that both new and existing NMS Stock 
ATSs would incur implementation costs in order to comply with the 
proposed amendments to Regulation ATS. Regardless of their size and 
transaction volume, all NMS Stock ATSs would need to ensure that their 
disclosures meet the requirements of proposed Form ATS-N and that they 
correctly file their Form ATS-N. NMS Stock ATSs may develop internal 
processes to ensure correct and complete reporting on Form ATS-N, which 
can be viewed as a fixed setup cost, which NMS Stock ATSs may have to 
incur, regardless of the amount of trading activity that takes place on 
them. As a result, these implementation costs may fall 
disproportionately on lower-dollar volume NMS Stock ATSs (as opposed to 
ATSs transacting greater dollar volume), since all ATSs would likely 
incur these fixed implementation costs. However, 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 NMS Stock ATSs would likely incur lower implementation costs 
because certain sections of proposed Form ATS-N (such as several items 
of Part III) would not be applicable to these NMS Stock ATSs.
    Relative to the baseline, the proposed amendments to Regulation ATS 
would also impose implementation costs for all NMS Stock ATSs, 
including legacy ATSs, in that they would require NMS Stock ATSs to 
adhere to heightened disclosure and reporting requirements regarding 
their operations. Existing NMS Stock ATSs should already comply with 
the current requirements of Regulation ATS. Therefore, the compliance 
costs of the proposed amendments should be incremental relative to the 
costs associated with the existing requirements. Specifically, the 
Commission preliminarily believes that the incremental costs would 
consist largely of providing new disclosures and updating records and 
retention policies necessary to comply with the proposed amendments. 
Based on the analysis for purposes of the PRA, the Commission 
preliminarily estimates that the proposed amendments to Regulation ATS 
relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including 
Proposed Form ATS-N, could result in a one-time burden of 141.3 hours 
for each NMS Stock ATS,\764\ which would result in an estimated one-
time paperwork compliance cost to an NMS Stock ATS of approximately 
$42,838.50.\765\ This would result in an aggregate estimated initial 
hour burden for all NMS Stock ATSs to complete Form ATS-N and comply 
with proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS of 
6,499.8 hours at an estimated cost of $1,970,571.00.\766\
---------------------------------------------------------------------------

    \764\ See supra note 643 and accompanying text.
    \765\ (Attorney at $380 x 54.8 hours) + (Compliance Manager at 
$283 x 43.5 hours) + (Senior Systems Analyst at $260 x 34.5 hours) + 
(Senior Marketing Manager at $254 x 1 hour) + (Compliance Clerk at 
$64 x 7.5 hours) = $42,838.50. This preliminary compliance cost 
estimate for a Form ATS-N includes the estimated costs associated 
with completing Part III, Item 2 and Part IV, Items 14 and 15 of 
proposed Form ATS-N, but as explained above, the Commission 
preliminarily believes that the majority of NMS Stock ATSs would not 
be required to complete those items of the proposed form. See supra 
Section XII.D.2.b.
    \766\ 141.3 burden hours x 46 NMS Stock ATSs = 6,499.8 burden 
hours. $42,838.50 x 46 NMS Stock ATSs = $1,970,571.00. This 
preliminary aggregate compliance cost estimate assumes that all NMS 
Stock ATSs would be required to complete Part III, Item 2 and Part 
IV, Items 14 and 15 of proposed Form ATS-N. However, as noted above, 
the Commission preliminarily estimates that only 6 NMS Stock ATSs 
would be required to complete Part III, Item 2, see supra note 609, 
only 1 NMS Stock ATS would be required to complete Part IV, Item 14, 
see supra note 641 and accompanying text, and only 2 NMS Stock ATSs 
would be required to complete Part IV, Item 15, see id.

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

[[Page 81121]]

    Furthermore, the Commission preliminarily believes that there would 
be implementation costs for ATSs that have not reduced to writing their 
safeguards and procedures to protect subscribers' confidential trading 
information and their oversight procedures to ensure that those 
safeguards and procedures are followed, which are required under Rule 
301(b)(10) of Regulation ATS.\767\ Based on the analysis for purposes 
of the PRA, the Commission preliminarily estimates that, in order to 
comply with the proposed amendments to Rules 301(b)(10) and 
303(a)(1)(v) of Regulation ATS,\768\ it could take approximately 15 
ATSs an estimated one-time burden of up to 10 hours each,\769\ 
resulting in an estimated one-time paperwork cost for each of those 15 
ATSs of $3,484.00 and an aggregate estimated hour burden of 150 hours 
at an estimated cost of $52,260.00.\770\
---------------------------------------------------------------------------

    \767\ See 17 CFR 242.301(b)(10).
    \768\ See supra Section IX.
    \769\ See supra notes 583-585.
    \770\ (Attorney at $380 x 9 hours) + (Compliance Clerk at $64 x 
1 hour) = $3,484.00. $3,484.00 x 15 ATSs = $52,260.00.
---------------------------------------------------------------------------

    In addition to the implementation costs mentioned above, there are 
also expected ongoing costs for NMS Stock ATSs to comply with the 
proposed amendments to Rule 3a1-1(a) and Regulation ATS. For instance, 
NMS Stock ATSs would incur ongoing costs associated with amending their 
Forms ATS-N prior to material changes in their operations, or to 
correct any information that has become inaccurate. Regardless of the 
reason for filing a Form ATS-N Amendment, the Commission preliminarily 
estimates for the purposes of the PRA that it could take an NMS Stock 
ATS approximately 28.5 hours annually \771\ to prepare and file its 
Form ATS-N Amendments at an estimated annual cost of $8,352.00.\772\ 
This would result in an estimated aggregate ongoing hour burden for all 
NMS Stock ATSs to amend their Forms ATS-N and comply with proposed 
Rules 301(b)(2)(viii) and 304 of Regulation ATS of 1,311 hours at an 
estimated cost of $384,192.00 annually.\773\
---------------------------------------------------------------------------

    \771\ See supra notes 644-651 and accompanying text. As 
explained above, the Commission preliminarily estimates that each 
NMS Stock ATS would file 3 Form ATS-N Amendments per year, and the 
hourly burden per amendment would be 9.5 hours.
    \772\ (Attorney at $380 x 16.5 hours) + (Compliance Manager at 
$283 x 6 hours) + (Compliance Clerk at $64 x 6 hours) = $8,352.00.
    \773\ 28.5 hours x 46 NMS Stock ATSs = 1,311 hours. $8,352.00 x 
46 NMS Stock ATSs = $384,192.00.
---------------------------------------------------------------------------

    Furthermore, the proposed amendments to Rules 301(b)(10) and 
303(a)(1)(v) relating to written safeguards and written procedures to 
protect subscribers' confidential trading information would impose 
ongoing costs for all ATSs. For the purposes of the PRA, the Commission 
preliminarily estimates it could take approximately 4 hours annually 
for each ATS to update and maintain these safeguards and 
procedures,\774\ resulting in an estimated annual paperwork cost for 
each ATS of $888.00.\775\ This would result in an estimated aggregate 
ongoing hour burden for all ATSs to maintain and update their 
safeguards and procedures pursuant to proposed Rules 301(b)(10) and 
303(a)(1)(v) of 336 hours at an estimated cost of $74,592.00 
annually.\776\
---------------------------------------------------------------------------

    \774\ See supra notes 586-587 and accompanying text.
    \775\ (Attorney at $380 x 2 hours) + (Compliance Clerk at $64 x 
2 hours) = $888.00 annual paperwork cost per ATS.
    \776\ 4 annual burden hours x 84 ATSs = 336 annual burden hours. 
$888.00 annual paperwork cost per ATS x 84 NMS Stock ATSs = 
$74,592.00 aggregate annual paperwork cost.
---------------------------------------------------------------------------

    Some existing NMS Stock ATSs that also transact in non-NMS stocks 
might incur additional costs due to the proposed amendments. As 
discussed above,\777\ pursuant to the proposed amendments to Regulation 
ATS, an ATS that effects transactions in both NMS stocks and non-NMS 
stocks would be subject to the requirements of Rule 304 with respect to 
its NMS stock trading operations and Rule 301(b)(2) with respect to its 
non-NMS stock trading operations. Accordingly, NMS Stock ATSs that also 
transact in non-NMS stocks would incur additional implementation costs 
when compared to ATSs that only trade NMS stocks because the former 
group would be required to file both Form ATS-N and a revised Form ATS 
that removes discussion of those aspects of the ATS related to the 
trading of NMS stocks. Those NMS Stock ATSs would also be required to 
file a pair of Forms ATS-R four times annually. For the purposes of the 
PRA, the Commission preliminarily estimates that the aggregate initial 
burden for those ATSs to file a Form ATS-N in regard to their NMS stock 
trading activity and a current Form ATS in regard to their non-NMS 
stock trading activity would be 1,774.3 hours \778\ at an aggregate 
estimated cost of $530,491.50.\779\ The Commission also preliminarily 
estimates that that the aggregate annual burden to file separate Forms 
ATS-R for those ATSs that effect transactions in both NMS stocks and 
non-NMS stocks would be 198 hours \780\ at an aggregate estimated cost 
of $1,394.\781\ Furthermore, the Commission preliminarily estimates 
that these ATSs that facilitate transactions in both NMS stocks and 
non-NMS stocks would incur an additional estimated recordkeeping burden 
of 3 hours annually per ATS, resulting in an estimated cost of $312.60 
per ATS \782\ and an aggregate estimated hour burden of 33 hours at an 
estimated cost of $3,438.60, due to the proposed amendments to Rule 
303(a)(2)(ii).\783\
---------------------------------------------------------------------------

    \777\ See supra Section IV.C.2.
    \778\ See supra notes 659-663 and accompanying text.
    \779\ ((Attorney for Form ATS at $380 x 13 hours) + (Attorney 
for Form ATS-N at $380 x 54.8 hours) + (Compliance Manager for Form 
ATS-N at $283 x 43.5 hours) + (Senior Systems Analyst for Form ATS-N 
at $260 x 34.5 hours) + (Senior Marketing Manager for Form ATS-N at 
$254 x 1 hour) + (Compliance Clerk for Form ATS at $64 x 7 hours) + 
(Compliance Clerk for Form ATS-N at $64 x 7.5 hours)) x 11 ATSs = 
$530,491.50 This preliminary aggregate compliance cost estimate 
includes the estimated costs associated with completing Part III, 
Item 2 and Part IV, Items 14 and 15 of proposed Form ATS-N, but as 
explained above, the Commission preliminarily believes that the 
majority of NMS Stock ATSs would not be required to complete those 
items of the proposed form. See supra Section XII.D.2.b.
    \780\ See supra notes 663 and accompanying text.
    \781\ (Attorney at $380 x 3.5 hours) + (Compliance Clerk at $64 
x 1 hours) = $1,394.
    \782\ At an average cost per burden hour of $104.20, see Rule 
303 PRA Update, supra note 580, 78 FR 43943, the resultant total 
related cost of compliance for each ATS would be $312.60 ((3 burden 
hours) x $104.20/hour).
    \783\ 3 hours x 11 ATSs = 33 burden hours. $312.60 x 11 ATSs = 
$3,438.60. See supra Section XII.D.2.b.vi.
---------------------------------------------------------------------------

    Currently, ATSs that transact in NMS stocks do not have the ability 
to access and file the Form ATS electronically. The Commission proposes 
that proposed Form ATS-N would be filed electronically in a structured 
format and would require an electronic signature. These proposed 
amendments to Regulation ATS would require that every NMS Stock ATS 
have the ability to file forms electronically with an electronic 
signature. The Commission's proposal contemplates the use of an online 
filing system, the EFFS. Based on the widespread use and availability 
of the Internet, the Commission preliminarily believes that filing Form 
ATS-N in an electronic format would be less burdensome and a more 
efficient filing process than the current paper process for NMS Stock 
ATSs and the Commission, as it is likely to be less expensive and 
cumbersome than mailing and filing paper forms to the Commission.
    To access EFFS, an NMS Stock ATS would need to submit to the 
Commission an EAUA to register each individual at the NMS Stock ATS who 
will access the EFFS system on behalf of the NMS Stock ATS. The

[[Page 81122]]

Commission is including in its estimates the burden for completing the 
EAUA for each individual at an NMS Stock ATS that will request access 
to EFFS.\784\ For the purposes of the PRA, the Commission preliminarily 
estimates that initially, on average, two individuals at each NMS Stock 
ATS will request access to EFFS through the EAUA, and each EAUA would 
require 0.15 hours to complete and submit.\785\ Therefore, each NMS 
Stock ATS would require 0.3 hours to complete the requisite EAUAs \786\ 
at a cost of $114.00,\787\ and the aggregate initial burden would be 
approximately 13.8 hours for all NMS Stock ATSs \788\ at a cost of 
$5,244.00.\789\ The Commission also preliminarily estimates that 
annually, on average, one individual at each NMS Stock ATS will request 
access to EFFS through the EAUA.\790\ Therefore, the ongoing burden to 
complete the EAUA would be 0.15 hours annually for each NMS Stock ATS 
\791\ at a cost of $57.00,\792\ and the aggregate ongoing burden would 
be approximately 6.9 hours for all NMS Stock ATSs \793\ at a cost of 
$2,622.00.\794\
---------------------------------------------------------------------------

    \784\ For the purpose of completeness, the Commission has also 
included the initial estimated burden and costs related to 
completing the EAUA in its burden and cost estimates for the initial 
ATS-N filings by NMS Stock ATSs. See supra note 643.
    \785\ See supra note 665 and accompanying text.
    \786\ 0.15 hours per EAUA x 2 individuals = 0.3 burden hours per 
NMS Stock ATS. These preliminary estimates are based on the 
Commission and its staff's experience with EFFS and EAUAs pursuant 
to Rule 19b-4 under the Exchange Act. The 0.3 hours represents the 
time spent by two attorneys. The Commission believes it is 
appropriate to estimate that, on average, each NMS Stock ATS will 
submit two EAUAs initially.
    \787\ Attorney at $380 x 0.3 hours per EAUA = $114.00.
    \788\ 0.30 hours per EAUA x 46 NMS Stock ATSs = 13.8 burden 
hours.
    \789\ $114 cost per NMS Stock ATS x 46 NMS Stock ATSs = 
$5,244.00.
    \790\ The Commission estimates that annually, on average, one 
individual at each NMS Stock ATS will request access to EFFS through 
EAUA to account for the possibility that an individual who 
previously had access to EFFS may no longer be designated as needing 
such access.
    \791\ 0.15 hours per EAUA x 1 individual = 0.15 hours.
    \792\ Attorney at $380 x 0.15 hours per EAUA = $57.00.
    \793\ 0.15 hours x 46 NMS Stock ATSs = 6.9 hours.
    \794\ $57 cost per NMS Stock ATS x 46 NMS Stock ATSs = 
$2,622.00.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily estimates that each NMS 
Stock ATS will designate two individuals to sign Form ATS-N each year. 
An individual signing a Form ATS-N must obtain a digital ID, at the 
cost of approximately $25.00 each year. Therefore, each NMS Stock ATS 
would require approximately $50.00 annually to obtain digital IDs for 
the individuals with access to EFFS for purposes of signing Form ATS-
N,\795\ and the aggregate initial burden would be approximately 
$2,300.00 for all NMS Stock ATSs.\796\
---------------------------------------------------------------------------

    \795\ $25 per digital ID x 2 individuals = $50.00 per NMS Stock 
ATS.
    \796\ $50 cost per NMS Stock ATS x 46 NMS Stock ATSs = $2,300.
---------------------------------------------------------------------------

    The Commission also preliminarily estimates that NMS Stock ATSs 
would incur a one-time cost to make public via posting on their Web 
sites a direct URL hyperlink to the Commission's Web site that contains 
their Form ATS-N filings.\797\ For the purposes of the PRA, the 
Commission preliminarily estimates that this initial, one-time burden 
would be approximately 2 hours per NMS Stock ATS at an estimated cost 
of $520.00,\798\ and the aggregate estimated burden for all NMS Stock 
ATSs would be approximately 92 hours \799\ at an estimated cost of 
$23,920.00.\800\
---------------------------------------------------------------------------

    \797\ See supra Section XII.D.2.b.v.
    \798\ Senior Systems Analyst at $260 x 2 hours = $520.00.
    \799\ 2 hours per NMS Stock ATS x 46 NMS Stock ATSs = 92 burden 
hours.
    \800\ $520 per NMS Stock ATS x 46 NMS Stock ATSs = $23,920.00.
---------------------------------------------------------------------------

2. Costs and Benefits of Public Disclosures of Proposed Form ATS-N
    The Commission is proposing Rule 304(b) to mandate greater public 
disclosure of NMS Stock ATS operations by making Form ATS-N and Form 
ATS-N Amendments publicly available on the Commission's Web site, 
requiring each NMS Stock ATS that has a Web site to post a direct URL 
hyperlink to the Commission's Web site that contains the documents 
enumerated in proposed Rule 304(b)(2), and providing for the posting of 
Commission orders related to the effectiveness of Form ATS-N on the 
Commission's Web site.\801\ The Commission's proposal to require such 
public disclosure is designed, in part, to increase the operational 
transparency requirements of NMS Stock ATSs in order to bring those 
requirements more in line with the operational transparency 
requirements of national securities exchanges.\802\ The Commission 
preliminarily believes the proposal should assist market participants 
in evaluating and choosing the NMS Stock ATSs to which they may route 
orders or become a subscriber due to the proposed enhanced disclosure 
requirements.
---------------------------------------------------------------------------

    \801\ See supra Section IV.D.
    \802\ See id.
---------------------------------------------------------------------------

    As mentioned above, the proposed amendments to Regulation ATS would 
make Form ATS-N publicly available, thereby improving the information 
available to market participants and making that information 
consistent. The Commission is proposing to amend Regulation ATS to 
require NMS Stock ATSs to file proposed Form ATS-N in lieu of Form 
ATS.\803\ Furthermore, the Commission is proposing to require NMS Stock 
ATSs to disclose on Form ATS-N detailed information about the 
activities of the broker-dealer operator of the NMS Stock ATS and the 
broker-dealer operator's affiliates, including: The operation of non-
ATS trading centers and other NMS Stock ATSs; products and services 
offered to subscribers; arrangements with unaffiliated trading centers; 
trading activities on the NMS Stock ATS by the broker-dealer operator 
or any of its affiliates; a SOR(s) (or similar functionality) or 
algorithm(s) used to send or receive orders or other trading interest 
to or from the ATS; personnel and third parties used to operate the NMS 
Stock ATS; differences in the availability of services, 
functionalities, or procedures between the broker-dealer operator or 
its affiliates and subscribers to the NMS Stock ATS; and safeguards and 
procedures to protect subscribers' confidential trading information. 
Proposed Form ATS-N would also require NMS Stock ATSs to provide 
detailed information about the manner of operations of the ATS, 
including: Subscribers; hours of operation; types of orders; 
connectivity, order entry, and co-location procedures; segmentation of 
order flow and notice about segmentation; display of order and other 
trading interest; trading services, including matching methodologies, 
order interaction rules, and order handling and execution procedures; 
procedures governing suspension of trading and trading during a system 
disruption or malfunction; opening, closing, and after-hours 
procedures; outbound routing services; market data; fees; trade 
reporting; clearance and settlement; order display and execution access 
(if applicable); fair access (if applicable); and market quality 
statistics published or provided to one or more subscribers. The 
Commission is proposing to make certain Form ATS-N filings available to 
the public on the Commission's Web site and to require an NMS Stock ATS 
that has a Web site to post on the NMS Stock ATS's Web site a direct 
URL hyperlink to the Commission's Web site that contains the

[[Page 81123]]

documents enumerated in proposed Rule 304(b)(2).
---------------------------------------------------------------------------

    \803\ As discussed above, to the extent an ATS trades both NMS 
stocks and non-NMS stocks, it would be required to file both a Form 
ATS and a Form ATS-N. See supra Section IV.C.2.
---------------------------------------------------------------------------

    Despite NMS Stock ATSs' increasing operational complexities and 
importance as a source of liquidity for NMS stocks, the Commission 
preliminarily believes that many market participants have limited 
information about NMS Stock ATSs' order handling and execution 
practices. As noted above, while the current disclosures on Form ATS 
are ``deemed confidential when filed,'' some ATSs voluntarily disclose 
their Form ATS filings.\804\ Accordingly, there is disparate publicly 
available information regarding the current operations of NMS Stock 
ATSs. Furthermore, even if an NMS Stock ATS publicly discloses its Form 
ATS, some subscribers of that ATS may be privy to more detailed 
information about how their orders are executed, routed and/or 
prioritized than other subscribers. Accordingly, the Commission 
preliminarily believes that, often, some subscribers are able to obtain 
a more complete picture of the operations of an NMS Stock ATS than 
other subscribers, and as a result, the latter group of subscribers may 
not be selecting the venue that most suits their investing or trading 
objectives. In addition, based on Commission experience, the 
confidentiality of Form ATS has not always resulted in NMS Stock ATSs 
disclosing significant details regarding their operations, services, 
and functions. Therefore, the status quo, as discussed above in Section 
XIII.B, is characterized by variable levels of public and confidential 
disclosure by NMS Stock ATSs, which makes it more difficult for both 
market participants to evaluate NMS Stock ATSs as potential trading 
venues and regulators to oversee NMS Stock ATSs.
---------------------------------------------------------------------------

    \804\ See supra notes 155-156.
---------------------------------------------------------------------------

a. Effects on Market Participants' Trading Decisions
    The Commission preliminarily believes that the public disclosure of 
Form ATS-N would produce economic benefits for market participants. 
Specifically, the Commission preliminarily believes that requiring 
detailed, public disclosures about the operations of NMS Stock ATSs 
would, among other things, better standardize the type of information 
market participants receive about those operations. As a result, search 
costs for market participants would be lower relative to the baseline, 
as homogenous disclosure requirements for all NMS Stock ATSs as part of 
the proposed amendments to Regulation ATS should facilitate market 
participants' comparison of NMS Stock ATSs when deciding which venue 
most suits their trading purposes. Accordingly, the Commission 
preliminarily believes the enhanced operational transparency resulting 
from the public disclosures on Form ATS-N should aid market 
participants when evaluating potential trading venues.
    The market for NMS stock execution services has also evolved such 
that national securities exchanges and NMS Stock ATSs have increasingly 
become direct competitors. However, as explained above, Form ATS 
filings continue to be ``deemed confidential when filed,'' while 
national securities exchanges must publicly file proposed rule changes 
and publicly disclose their entire rulebooks.\805\ The Commission 
preliminarily believes that replacing the current Form ATS with 
proposed Form ATS-N and making Form ATS-N public would reduce the 
discrepancy in information that different market participants receive 
about NMS Stock ATSs relative to the information they receive about 
national securities exchanges, which would better enable market 
participants to compare the stock execution services of NMS Stock ATSs 
against those of national securities exchanges. For instance, having 
information allowing a more complete comparison between the trading 
operations of NMS Stock ATSs and national securities exchanges could 
reveal to a market participant certain order handling and preferencing 
differences that might result in superior or inferior treatment of 
orders handled by an NMS Stock ATS. It could also reveal differences in 
fee structures among subscribers that may result in costlier or less 
costly execution on a particular trading platform.
---------------------------------------------------------------------------

    \805\ See supra notes 155-162 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed amendments 
would appropriately calibrate the level of transparency between NMS 
Stock ATSs and national securities exchanges, fostering even greater 
competition for order flow of NMS stocks between those trading 
platforms. As noted above, the Commission also preliminarily believes 
that the proposed enhanced disclosure requirements for NMS Stock ATSs 
would calibrate the level of transparency among different NMS Stock 
ATSs. Moreover, requiring Form ATS-N to be made public upon being 
declared effective should lead to additional scrutiny of NMS Stock ATSs 
by market participants. Therefore, the Commission preliminarily 
believes that the proposal could foster even greater competition for 
order flow of NMS stocks among NMS Stock ATSs and between NMS Stock 
ATSs and national securities exchanges, which could lead to lower 
spreads and thereby foster greater capital formation and increased 
market liquidity relative to the baseline. This in turn could enhance 
execution quality and lower information opaqueness surrounding an NMS 
Stock ATS's operations.
    The Commission also preliminarily believes that the proposed 
requirement for NMS Stock ATSs to disclose whether and how they segment 
their order flow, any criteria used to assign order flow, and their fee 
structures should provide market participants with a better 
understanding of the operating environment for NMS Stock ATSs. Search 
costs to identify which NMS Stock ATSs better serve a market 
participant's trading interests should be reduced relative to the 
baseline, as market participants may be more able to predict how their 
orders will be executed. Broker-dealers might also make better routing 
decisions for their particular interests, and the interests of their 
customers, which might therefore lead to better execution quality. 
Also, the proposed enhanced disclosure requirements for NMS Stock ATSs 
could better enable market participants to review trading decisions 
made by their broker-dealers. This in turn could lower the level of 
uncertainty that was present in the baseline regarding how orders would 
be executed on NMS Stock ATSs. As such, the Commission preliminarily 
believes that the proposed amendments to Regulation ATS could help 
market participants understand how their orders will be executed on an 
NMS Stock ATS and evaluate any potential conflicts of interest 
involving the broker-dealer operator and its affiliates when handling 
such orders.
    At the same time, the proposed enhanced disclosure requirements for 
NMS Stock ATSs could benefit certain ATSs or national securities 
exchanges. For example, market participants would be aware of which NMS 
Stock ATSs may offer better execution services or better protection 
against the dissemination of their non-public trading information, and 
as a result, these ATSs might attract even more order flow. By 
attracting greater order flow, NMS Stock ATSs might, in turn, provide 
benefits to market participants by offering them a trading platform 
that is more liquid and, possibly, has lower trading costs.
    In the adopting release for Regulation ATS, the Commission 
explained that it believed that the regulatory framework established by 
Regulation ATS would

[[Page 81124]]

encourage innovation and encourage the growing role of technology in 
the securities markets.\806\ Since the establishment of Regulation ATS, 
the market for order execution services for trading NMS stocks--
particularly on ATSs--has flourished. The number of ATSs that trade NMS 
stocks has increased substantially since the inception of Regulation 
ATS, and as of the end of the second quarter of 2015, trading volume of 
NMS stocks on ATSs accounted for 15% of total share volume.\807\ As it 
is expected to calibrate the level of transparency between NMS Stock 
ATSs and national securities exchanges, the proposal may foster greater 
competition for order flow of NMS stocks between these trading 
platforms. This greater competition for order flow may in turn 
incentivize NMS Stock ATSs to innovate--particularly in terms of their 
technology--so that they can attract more trading volume to their 
venue.
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    \806\ See Regulation ATS Adopting Release, supra note 7, at 
70910.
    \807\ See supra Section III.A.
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    The proposed requirement under Part IV, Item 16 of proposed Form 
ATS-N to explain and provide aggregate platform-wide order flow and 
execution statistics regarding the NMS Stock ATS, which are not 
otherwise required disclosures under Exchange Act Rule 605 of 
Regulation NMS but still published or otherwise provided to one or more 
subscribers by the NMS Stock ATS, could have several potential economic 
effects. The economic effects would depend not only on the extent to 
which ATSs currently provide or publish such information and the 
content of the information which the Commission currently does not have 
(such as what order flow and execution statistics NMS Stock ATSs 
produce, how they are calculated and whether they are standardized 
across ATSs, and which subscribers currently receive these 
statistics),\808\ but also on how NMS Stock ATSs choose to comply with 
the proposed amendments. Some NMS Stock ATSs may not currently disclose 
market quality statistics not otherwise required under Exchange Act 
Rule 605, and these ATSs would not incur costs to comply with the 
proposed disclosure requirements under Part IV, Item 16 of proposed 
Form ATS-N; therefore, the proposed disclosure requirements would 
provide no benefits to market participants in such cases. Additionally, 
there may be some NMS Stock ATSs that currently provide these aggregate 
platform-wide order flow and execution statistics not just to their 
subscribers, but also to the broader public. In such cases, the 
proposed disclosure requirements under Part IV, Item 16 of proposed 
Form ATS-N may not provide any additional benefit to market 
participants because the information required under Item 16 would 
already be publicly available.
---------------------------------------------------------------------------

    \808\ See supra Section XIII.B.3.
---------------------------------------------------------------------------

    Furthermore, NMS Stock ATSs that currently provide these aggregate 
platform-wide order flow and execution statistics to one or more 
subscribers could continue to provide its subscribers with these market 
quality statistics, in which case, under the proposal, the NMS Stock 
ATS would publicly disclose these statistics and how they are 
calculated in proposed Form ATS-N. Another possibility is that these 
NMS Stock ATSs may choose to stop providing market quality statistics 
to subscribers so as not to have to publicly disclose information about 
those statistics and/or the statistics themselves in Form ATS-N. To the 
extent that an NMS Stock ATS continues to provide aggregate platform-
wide order flow and execution statistics to subscribers only, it would 
publicly disclose and describe how those statistics are calculated in 
Form ATS-N, and all market participants, not just subscribers would 
have access to the information, which the Commission preliminarily 
believes would improve the opportunity for more market participants to 
benefit from this information. In addition, to the extent that 
subscribers that receive those market quality statistics currently do 
not know how the NMS Stock ATS calculates the market quality 
statistics, the proposal would help these subscribers better understand 
the statistics, and such information may be useful when evaluating an 
NMS Stock ATS as a possible venue to which to route orders in order to 
accomplish their investing or trading objectives.
    However, NMS Stock ATSs that choose to publicly disclose aggregate 
platform-wide order flow and execution statistics regarding the NMS 
Stock ATS, which are not otherwise required disclosures under Exchange 
Act Rule 605 of Regulation NMS but still published or otherwise 
provided to one or more subscribers by the NMS Stock ATS would incur 
costs to do so. Therefore, some NMS Stock ATSs may choose to comply 
with the proposal by ceasing to disclose these market quality 
statistics to subscribers. As a result, the proposal could reduce 
transparency to the detriment of the subscribers who currently benefit 
from the receipt of certain market quality statistics regarding an NMS 
Stock ATS, which could in turn result in spill-over effects on the 
market. Furthermore, the decision of whether to continue to disclose 
such statistics could depend, in part, on how favorable the statistics 
make the ATS appear. As such, if some NMS Stock ATSs choose to stop 
disclosing order flow and execution statistics due to the proposed 
requirements of Item 16 while others decide to make those statistics 
public through their Form ATS-N filings, market participants may 
perceive the latter group of NMS Stock ATSs as having better execution 
quality, and these trading venues may therefore benefit by attracting 
even more order flow as a result of such perceptions.
    As most NMS Stock ATSs are operated by broker-dealers that also 
engage in other brokerage and dealing activities, a broker-dealer 
operator of an NMS Stock ATS, or its affiliates, may have business 
interests that compete with the ATS's subscribers, or customers of its 
subscribers, which in turn may give rise to potential conflicts of 
interest.\809\ For instance, multi-service broker-dealers may execute 
orders in NMS stocks internally on non-ATS trading centers by trading 
as principal against such orders, or by crossing orders as agent in a 
riskless principal capacity. The Commission preliminarily expects that 
the proposal could discourage broker-dealer operators from trading 
internally as principal in their NMS Stock ATS under circumstances 
where such might raise conflict of interest concerns because those 
operations would be subject to public scrutiny by market participants 
seeking to trade on the ATS.
---------------------------------------------------------------------------

    \809\ The Commission notes that, based on information provided 
on Form ATS, a small number of ATSs solely limit their broker-dealer 
business to the operation of an ATS.
---------------------------------------------------------------------------

    In addition to the possible conflicts of interest that may arise 
from internalization, broker-dealer operators that control and operate 
multiple NMS Stock ATSs may also face conflicts of interest. This is 
because such broker-dealers might operate competing trading venues for 
the execution of orders in NMS stocks without having fully separated 
the functions of these competing trading centers. As a result of these 
overlapping functionalities, broker-dealers operating multiple NMS 
Stock ATSs may provide subscribers of one ATS--which could include 
business units of the broker-dealer or its affiliates--with access to 
services or information about the other ATS that it does not provide to 
other subscribers. The Commission preliminarily believes that the 
proposed enhanced disclosure requirements should provide market

[[Page 81125]]

participants with information to better evaluate potential conflicts of 
interest when making trading decisions; any resultant change in order 
flow to an NMS Stock ATS with such potential conflicts might cause that 
ATS to alter its operations to reduce such conflicts.
b. Structuring of Proposed Form ATS-N
    The Commission is proposing that proposed Form ATS-N be filed 
electronically through the EFFS system in a structured data format. The 
Commission is proposing to make public on the Commission's Web site, 
among other things, an effective Form ATS-N, and each properly filed 
Form ATS-N Amendment upon filing with the Commission. The Commission 
would post the Form ATS-N or Form ATS-N Amendment in the same format 
that the Commission received the data.
    The Commission preliminarily believes that by having NMS Stock ATSs 
file the proposed Form ATS-N in a structured data format, the 
information's usability for market participants would be enhanced. Once 
the data is structured, it is not only human-readable, but also becomes 
machine-readable such that market participants could download the 
information directly into databases and analyze it using various 
software. With structured data, what was static, text-based in