With the intent of significantly enhancing operational transparency and regulatory oversight, the Securities and Exchange Commission on July 18 voted to adopt amendments to the regulatory requirements governing alternative trading systems (ATS), commonly known as “dark pools.”
The amendments to Regulation ATS would impose new public disclosure requirements on, and enhance the Commission’s oversight of, ATS that facilitate transactions in National Market System stocks (NMS stock). “The U.S. equity markets have evolved substantially since Regulation ATSs was adopted almost 20 years ago,” said SEC Chairman Jay Clayton. “Today, many NMS stock ATSs actively compete with national securities exchanges for order flow and operate with comparable speed and sophistication.”
“That said, there is a significant difference between the information national securities exchanges, on the one hand, and NMS stock ATSs, on the other hand, are required to disclose to the public,” Clayton said. “For instance, national securities exchanges are required to maintain a publicly posted rulebook and publicly file all of their proposed rule changes with the Commission.”
“In contrast, NMS stock ATSs generally file information about their operations with the Commission on a confidential basis, and that information is not required to be publicly released or even shared with their subscribers,” Clayton added. “This absence—or in the best cases, asymmetric level—of information about the operations of NMS stock ATSs relative to national securities exchanges can inhibit market participants’ and intermediaries’ understanding of how orders interact, are matched, and are executed on NMS stock ATSs.”
The amendments are aimed at filling these information gaps by requiring certain ATSs to file detailed public disclosures on new Form ATS-N. “For the first time, ATSs that trade National Market System will be required to publicly reveal important information about who they are, what they do, and how they do it,” said SEC Commissioner Kara Stein. “Investors will gain new insight into the range of trading centers available and into their services and fees. The provision of a wide array of information to the marketplace should help both buyers and sellers and will likely result in an increase in competition.”
These disclosures are designed to allow market participants to assess potential conflicts of interest—for example, a broker-dealer operator will need to disclose a potential conflict that might arise from its own dealing activities within the dark pool—and risks of information leakage arising from the ATS-related activities of the ATS’ broker-dealer operator and its affiliates.
In addition, for the first time, all ATS will be required to put in writing safeguards and procedures to protect confidential trading information, Stein said. Furthermore, all ATS that trade NMS stocks will be required to publicly describe their safeguards and procedures for protecting confidential trading information.
“Promoting greater transparency through public disclosure of information about NMS Stock ATSs should help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives,” Clayton said.
The amendments also provide a process for the Commission to review Form ATS-N filings and, after notice and opportunity for hearing and upon certain findings, declare a Form ATS-N ineffective.
Forms ATS-N will be made publicly available on the Commission’s Website via the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.