SEC Open Meeting on ATS Operational Transparency Proposal
Securities and Exchange Commission
ATS Operational Transparency Proposal Open Meeting
November 18, 2015
Key Topics & Takeaways
- Unanimous Approval: The SEC unanimously voted in favor of proposing rules to enhance operational transparency and regulatory oversight of ATSs that trade stocks listed on a national securities exchange, including “dark pools.”
- Informed Choices: SEC Commissioners agreed that the proposed rules will enable investors to make informed choices and provide the public with increased information regarding the operation of ATSs.
- Competition for Order Flow: SEC staff noted that the proposed rules may foster increased competition for order flow and liquidity, however the proposal poses the risk of increased costs and barriers to entry.
Meeting Participants
- Mary Jo White, SEC Chair
- Luis Aguilar, SEC Commissioner
- Kara Stein, SEC Commissioner
- Michael Piwowar, SEC Commissioner
- Stephen Luparello, SEC Division of Trading and Markets
- Tyler Raimo, SEC Division of Trading and Market
- Mark J. Flannery, SEC Division of Economic and Risk Analysis
Opening Statements
Opening remarks by Chair White
Chair White opened by stating that the proposal will provide significant new information to the public about Alternative Trading System (“ATS”) operations. White provided that the collection and dissemination of this information will allow the Securities and Exchange Commission (“Commission” or “SEC”) and the public to assess trading on particular ATS platforms. Chair White noted that the equity markets have evolved significantly, with ATSs now accounting for over 15 percent of the total volume of National Market System (“NMS”) stocks traded. As a result, she stated that it is now time to amend Reg. ATS in order to “shine a brighter light” on ATSs for the betterment of investors and the market generally.
White provided that today’s recommendations represent a significant step towards “modernizing” Reg. ATS and noted that central to this modernization is the requirement that ATS provide specific disclosures regarding their operations and activities of their affiliates.
White indicated that the enhanced transparency provided by the new Form ATS-N will address and inform investors of potential conflicts of interest. White noted that the proposal, for the most part, will apply only to ATSs that trade in NMS securities and that it is not being extended to fixed income platforms.
Aguilar stated that he supports the proposal, as “it will go a long way” to help market participants make informed decisions. Aguilar noted that ATSs began to truly flourish following the adoption of Reg. NMS, and that certain ATSs now execute a larger percentage of consolidated volume than certain smaller exchanges.
Aguilar stated that conflicts of interest with ATSs and their affiliates may exist, as demonstrated by a number of SEC enforcement actions. Aguilar indicated that this has resulted in some investors losing faith with dark pools, and that some institutional investors have started their own ATSs in order to eliminate conflicts of interest. Aguilar stated that this is a “clear warning” that the market is not working as intended.
Aguilar added that market participants lack crucial information regarding ATS operations and said the proposal today will furnish the Commission and investors with much needed detail, particularly related to potential conflicts of interest. Aguilar posed the question if additional measures are needed, such as revisiting the definition of “block size” to better reflect today’s equity market. Lastly, Aguilar noted that an “informed regulator is a better regulator”.
Stein supported the proposal and stated that it seeks to “shine a light into darkness.” Stein noted the similarities of exchanges and ATSs, and highlighted that ATSs have a “growing footprint in the market.” She provided that the proposal relies heavily on the tool of disclosure and that greater transparency will benefit both issuers and investors, adding that the proposals will answer “basic questions” regarding an ATSs operations, including information on fees and its smart order router. Stein questioned, however, if the Commission is “doing enough” and if more should be done to address potential conflicts of interest.
Commissioner Michael Piwowar
Piwowar stated that he supports the proposal, that the rule reflects Commissioners’ input, and it holds the promise to make ATSs more transparent to the public. Commissioner Piwowar stated however, that the Commission is not introducing a “regime of merit review”.
Piwowar raised several additional questions that the public should consider when evaluating the proposal, including if it strikes the right balance with the regulatory regime between ATSs and exchanges.
Presentation by SEC staff
Stephen Luparello, Division of Trading and Markets
Luparello stated that the proposed amendments to Reg. ATS would disclose key details of ATS operations, noting that ATSs compete with and operate nearly the same as exchanges. Luparello stated that he believed that the proposed disclosure requirements would allow investors to make more informed decisions, for instance routing decisions. He further noted that the proposal would provide a process for the Commission to determine if an ATS qualifies for the exemption from exchange registration.
Tyler Raimo, Division of Trading and Market
Raimo provided an overview of the proposal, notably that the new Rule 304 would require NMS stock ATSs to provide more detailed disclosure on the new Form ATS-N, including the activities of an ATS, its broker-dealer affiliates, its use of smart order routers, and the employees that service the ATS. Additionally, Form ATS-N would require disclosure of the types of subscribers, hours of operation, connectivity arrangements, market data feeds, etc.
Raimo stated that the new Form ATS-N would be made publically available on the SEC’s website and that the proposal would provide a process for the Commission to review Form ATS-N filings, and the ability to declare, by order, if initial filings on Form ATS-N are effective or ineffective.
Lastly, Raimo provided that the proposal would amend Regulation ATS to require all ATSs to have and maintain written safeguards and procedures to protect the confidential trading information of their subscribers, as well as written procedures to ensure that those safeguards and procedures are followed.
Mark J. Flannery, Division of Economic and Risk Analysis
Flannery stated that the potential effects of efficiency and competition were considered. Flannery noted that the proposed amendments, will foster more competition for order flow, and could lower trading costs, and increase liquidity and capital formation. Flannery provided however, that there may be greater costs associated with disclosure, and that some ATS may chose to exist the market, and that the increased disclosure requirements may raise the barrier to entry. Hence, he stated the potential exists for greater barriers to entry and reduced trading options, while at the same time, such a reduction in ATSs may result better execution quality on other trading venues.
The Commission then voted unanimously to approve proposing rules to enhance operational transparency and regulatory oversight of ATSs.
For more information on this meeting, please click here.
Securities and Exchange Commission
ATS Operational Transparency Proposal Open Meeting
November 18, 2015
Key Topics & Takeaways
- Unanimous Approval: The SEC unanimously voted in favor of proposing rules to enhance operational transparency and regulatory oversight of ATSs that trade stocks listed on a national securities exchange, including “dark pools.”
- Informed Choices: SEC Commissioners agreed that the proposed rules will enable investors to make informed choices and provide the public with increased information regarding the operation of ATSs.
- Competition for Order Flow: SEC staff noted that the proposed rules may foster increased competition for order flow and liquidity, however the proposal poses the risk of increased costs and barriers to entry.
Meeting Participants
- Mary Jo White, SEC Chair
- Luis Aguilar, SEC Commissioner
- Kara Stein, SEC Commissioner
- Michael Piwowar, SEC Commissioner
- Stephen Luparello, SEC Division of Trading and Markets
- Tyler Raimo, SEC Division of Trading and Market
- Mark J. Flannery, SEC Division of Economic and Risk Analysis
Opening Statements
Opening remarks by Chair White
Chair White opened by stating that the proposal will provide significant new information to the public about Alternative Trading System (“ATS”) operations. White provided that the collection and dissemination of this information will allow the Securities and Exchange Commission (“Commission” or “SEC”) and the public to assess trading on particular ATS platforms. Chair White noted that the equity markets have evolved significantly, with ATSs now accounting for over 15 percent of the total volume of National Market System (“NMS”) stocks traded. As a result, she stated that it is now time to amend Reg. ATS in order to “shine a brighter light” on ATSs for the betterment of investors and the market generally.
White provided that today’s recommendations represent a significant step towards “modernizing” Reg. ATS and noted that central to this modernization is the requirement that ATS provide specific disclosures regarding their operations and activities of their affiliates.
White indicated that the enhanced transparency provided by the new Form ATS-N will address and inform investors of potential conflicts of interest. White noted that the proposal, for the most part, will apply only to ATSs that trade in NMS securities and that it is not being extended to fixed income platforms.
Aguilar stated that he supports the proposal, as “it will go a long way” to help market participants make informed decisions. Aguilar noted that ATSs began to truly flourish following the adoption of Reg. NMS, and that certain ATSs now execute a larger percentage of consolidated volume than certain smaller exchanges.
Aguilar stated that conflicts of interest with ATSs and their affiliates may exist, as demonstrated by a number of SEC enforcement actions. Aguilar indicated that this has resulted in some investors losing faith with dark pools, and that some institutional investors have started their own ATSs in order to eliminate conflicts of interest. Aguilar stated that this is a “clear warning” that the market is not working as intended.
Aguilar added that market participants lack crucial information regarding ATS operations and said the proposal today will furnish the Commission and investors with much needed detail, particularly related to potential conflicts of interest. Aguilar posed the question if additional measures are needed, such as revisiting the definition of “block size” to better reflect today’s equity market. Lastly, Aguilar noted that an “informed regulator is a better regulator”.
Stein supported the proposal and stated that it seeks to “shine a light into darkness.” Stein noted the similarities of exchanges and ATSs, and highlighted that ATSs have a “growing footprint in the market.” She provided that the proposal relies heavily on the tool of disclosure and that greater transparency will benefit both issuers and investors, adding that the proposals will answer “basic questions” regarding an ATSs operations, including information on fees and its smart order router. Stein questioned, however, if the Commission is “doing enough” and if more should be done to address potential conflicts of interest.
Commissioner Michael Piwowar
Piwowar stated that he supports the proposal, that the rule reflects Commissioners’ input, and it holds the promise to make ATSs more transparent to the public. Commissioner Piwowar stated however, that the Commission is not introducing a “regime of merit review”.
Piwowar raised several additional questions that the public should consider when evaluating the proposal, including if it strikes the right balance with the regulatory regime between ATSs and exchanges.
Presentation by SEC staff
Stephen Luparello, Division of Trading and Markets
Luparello stated that the proposed amendments to Reg. ATS would disclose key details of ATS operations, noting that ATSs compete with and operate nearly the same as exchanges. Luparello stated that he believed that the proposed disclosure requirements would allow investors to make more informed decisions, for instance routing decisions. He further noted that the proposal would provide a process for the Commission to determine if an ATS qualifies for the exemption from exchange registration.
Tyler Raimo, Division of Trading and Market
Raimo provided an overview of the proposal, notably that the new Rule 304 would require NMS stock ATSs to provide more detailed disclosure on the new Form ATS-N, including the activities of an ATS, its broker-dealer affiliates, its use of smart order routers, and the employees that service the ATS. Additionally, Form ATS-N would require disclosure of the types of subscribers, hours of operation, connectivity arrangements, market data feeds, etc.
Raimo stated that the new Form ATS-N would be made publically available on the SEC’s website and that the proposal would provide a process for the Commission to review Form ATS-N filings, and the ability to declare, by order, if initial filings on Form ATS-N are effective or ineffective.
Lastly, Raimo provided that the proposal would amend Regulation ATS to require all ATSs to have and maintain written safeguards and procedures to protect the confidential trading information of their subscribers, as well as written procedures to ensure that those safeguards and procedures are followed.
Mark J. Flannery, Division of Economic and Risk Analysis
Flannery stated that the potential effects of efficiency and competition were considered. Flannery noted that the proposed amendments, will foster more competition for order flow, and could lower trading costs, and increase liquidity and capital formation. Flannery provided however, that there may be greater costs associated with disclosure, and that some ATS may chose to exist the market, and that the increased disclosure requirements may raise the barrier to entry. Hence, he stated the potential exists for greater barriers to entry and reduced trading options, while at the same time, such a reduction in ATSs may result better execution quality on other trading venues.
The Commission then voted unanimously to approve proposing rules to enhance operational transparency and regulatory oversight of ATSs.
For more information on this meeting, please click here.