Responses to these frequently asked questions represent the views of staff of the Division of Trading and Markets (“Staff”). They are not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). Furthermore, the Commission has neither approved nor disapproved their content. These responses, like all staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person. Additional information on Regulation ATS can be found in the Commission’s 1998 and 2018 adopting releases, available at: https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.[1]
The Staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.”
For further information contact: Tyler Raimo, Assistant Director, at (202) 551-6227, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.
Background
Regulation ATS established a regulatory framework for “alternative trading systems” (“ATSs”).[2] An ATS is a trading system that meets the definition of “exchange” under federal securities laws but is not required to register as a national securities exchange if the ATS operates under an exemption provided under Rule 3a1-1(a) of the Securities Exchange Act of 1934 (“Exchange Act”).[3] To operate under this exemption, an ATS must comply with the requirements set forth in Rules 300-303 of Regulation ATS.[4] ATSs that trade NMS stocks (“NMS Stock ATS”) must comply with Rule 304 of Regulation ATS in addition to Rules 300-303.[5]
One provision of Regulation ATS that could apply to any ATS is Rule 301(b)(5), otherwise known as the “Fair Access Rule.”[6] The Fair Access Rule requires an ATS that has a significant percentage of overall trading volume in a security or category of securities during a certain period of time to comply with a number of heightened requirements. One of those requirements is that an ATS must establish written standards for granting access to trading on the ATS. A second, related requirement is that an ATS must not unreasonably prohibit or limit access by applying those access standards in an unfair or discriminatory manner.[7]
The following questions and answers have been compiled by the Staff to assist ATSs and other market participants in better understanding the application of the Fair Access Rule.
Fair Access Rule Application
- What categories of securities are relevant in considering whether an ATS must comply with the Fair Access Rule?
An ATS may become subject to the Fair Access Rule where it reaches specified volume in the following categories of securities:
- any NMS stock, as such term is defined in Exchange Act Rule 600 of Regulation NMS; provided, however, that a debt or convertible debt security is not treated as an NMS stock for purposes of Regulation ATS.[8]
- any equity security that is not an NMS stock. Equity securities include a range of financial products and are defined under Section 3(a)(11) of the Exchange Act and Rule 3a1-1 thereunder.[9]
- municipal securities, as such term is defined in Section 3(a)(29) of the Exchange Act.[10]
- corporate debt securities, as such term is defined in Rule 300(i) of Regulation ATS.[11]
- When does the Fair Access Rule apply to an ATS?
The Fair Access Rule applies when an ATS, during at least 4 of the preceding 6 months, had:[12]
- 5 percent or more of the average daily volume in an NMS stock reported by an effective transaction reporting plan;
- 5 percent or more of the average daily volume in an equity security that is not an NMS stock for which transactions are reported to, and calculated by a self-regulatory organization, such as the Financial Industry Regulatory Authority (“FINRA”);
- 5 percent or more of the average daily volume of municipal securities traded in the United States;[13] or
- 5 percent or more of the average daily volume of corporate debt securities traded in the United States.[14]
An ATS that meets any of the above criteria must comply with Rule 301(b)(5)(ii) of the Fair Access Rule unless an exemption or the exclusion under Rule 301(b)(5)(iii) applies (See FAQs Nos. 9 and 10 below).
- Are the average daily volume thresholds in Rule 301(b)(5)(i) for NMS stocks and equity securities that are not NMS stocks calculated based on share volume or dollar volume?
The average daily volume thresholds set forth in Rule 301(b)(5)(i) for NMS stocks and equity securities that are not NMS stocks are calculated based on the share volume (not dollar volume) of the transactions on the ATS.[15]
- If an NMS Stock ATS accounted for more than 5 percent of the average daily volume of an NMS stock in January, February, April, and June, must the NMS Stock ATS comply with the Fair Access Rule in July?
Yes. As of July, the NMS Stock ATS would have crossed the applicable volume threshold for the NMS stocks in 4 of the preceding 6 months, and thus the NMS Stock ATS would be required to comply with Rule 301(b)(5)(ii) unless an exemption or the exclusion under Rule 301(b)(5)(iii) applies.[16] An ATS is subject to the Fair Access Rule when it exceeds 5 percent average daily volume threshold during at least 4 of the preceding 6 months.
- If the NMS Stock ATS from the preceding example did not account for 5 percent of the average daily volume in the same NMS stock in July, must the NMS Stock ATS comply with the Fair Access Rule in August?
No. As of August, the NMS Stock ATS would have crossed the applicable volume threshold for the NMS stock in only 3 of the preceding 6 months, and thus the requirements of Rule 301(b)(5)(ii) would not apply.
Fair Access Rule Requirements
- What must an ATS do to comply with the Fair Access Rule requirements?
Under Rule 301(b)(5)(ii), an ATS subject to the Fair Access Rule requirements must: (A) establish written standards for granting access to trading on its system; (B) not unreasonably prohibit or limit any person in respect to access to services offered by the ATS by applying the established written standards in an unfair or discriminatory manner (See FAQ No. 8 below); (C) make and keep certain records regarding the granting, denial, and limitation of such access;[17] and (D) report certain information to the Commission on Form ATS-R regarding the grants, denial, and limitations of such access.[18]
- An NMS Stock ATS accounted for more than 5 percent in average daily volume in 15 NMS stocks during 4 of the preceding 6 months. Assuming no exemption or exclusion applies, do the Fair Access Rule requirements apply for trading in all NMS stocks on that particular NMS Stock ATS?
No. For NMS stocks and equity securities that are not NMS stocks, the Fair Access Rule requirements apply only on a security-by-security basis. Accordingly, the NMS Stock ATS would be required to comply with Rule 301(b)(5)(ii) of Regulation ATS with respect to the 15 NMS stocks that accounted for more than 5 percent in average daily volume on the NMS Stock ATS during 4 of the preceding 6 months.
In contrast, if an ATS accounts for 5 percent or more in the category of municipal or corporate debt securities traded in the United States, then all of the municipal or corporate debt securities traded on the ATS would be subject to the fair access requirements.[19]
- Do the requirements to establish and apply written standards under Rule 301(b)(5)(ii) (A) and (B) apply when the ATS grants: (i) prospective subscribers permission to access the ATS; (ii) permissioned subscribers to access services offered by the ATS; or (iii) both?
The Fair Access Rule requirements for establishing and applying written standards under Rule 301(b)(5)(ii)(A) and (B) relate to when the ATS both (i) denies permission to prospective subscribers to access the ATS; and (ii) limits permissioned subscribers access to services offered by the ATS.
For example, an ATS might require prospective subscribers to meet pre-conditions before participating in the ATS. Some ATSs might require a prospective subscriber to be a registered broker-dealer or establish certain minimum capital or credit requirements. An ATS may deny a prospective subscriber access to the ATS if such requirements are not met.[20] As another example, an ATS may deny a prospective subscriber access to the ATS based on relevant, unfavorable disciplinary history.[21] If the Fair Access Rule applies, then pre-conditions such as these that are standards must be reflected in written form. In terms of content, the Fair Access Rule requires that such standards must not unreasonably prohibit or limit access of any person from being granted access the ATS. Accordingly, the standards for granting access to prospective subscribers to the ATS must be reasonable.
Similarly, where an ATS subject to the Fair Access Rule limits the services offered by the ATS among permissioned subscribers, the ATS must have written standards regarding those limitations that are reasonable.[22] Some ATSs, for example, might offer different services, or levels of a service, to one subscriber or among different classes of subscribers. An ATS might segment subscriber order flow into specific categories (i.e., based upon the type of market participant generating the order flow) and allow certain subscribers the ability to select which specific category of order flow they wish to interact with in trading on the ATS. ATSs might limit services, for example, order display features, order entry means, or fees, to one subscriber or a class of subscribers. An ATS subject to the Fair Access Rule, however, could not offer a service or level of service to only one subscriber or class of subscribers unless the ATS has established written standards that do not unreasonably prohibit or limit access of permissioned subscribers to the service or level of service. Accordingly, as for prospective subscribers, the standards for limiting access to permissioned subscribers must be reasonable.
For both prospective and permissioned subscribers, the written standards must be applied in a fair and non-discriminatory manner. For example, if an ATS has a standard that only broker-dealer subscribers are granted access to a certain order type, and assuming such standard is reasonable, then the ATS must apply that standard to all of its broker-dealer subscribers in a fair and non-discriminatory manner. Accordingly, if an ATS precluded some of its broker-dealer subscribers from accessing the aforementioned order type, then that ATS would not be applying its standards fairly or objectively.[23]
- Is there an exclusion available from the Fair Access Rule requirements for certain ATSs?
Yes. Rule 301(b)(5)(iii) of Regulation ATS excludes an ATS from the Fair Access Rule requirements where: (i) the ATS matches customer orders for a security with other customer orders; (ii) such customers’ orders are not displayed to any person, other than employees of the ATS; and (iii) such orders are executed at a price for such security disseminated by an effective transaction reporting plan, or derived from such prices.[24]
- Is the Rule 301(b)(5)(iii) exclusion from the Fair Access Rule requirements available to an ATS that matches customer orders with principal orders of the broker-dealer operator of the ATS?
No. The exclusion provided in Rule 301(b)(5)(iii) is not available to an ATS that matches customer orders with principal orders of the broker-dealer operator of the ATS.
[1] See Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) (“Regulation ATS Adopting Release”); Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (August 7, 2018) (“Regulation NMS Stock ATS Adopting Release”).
[2] Rule 300(a) of Regulation ATS provides that an ATS is “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 [Exchange Act 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 [ATS]; or (ii) [d]iscipline subscribers other than by exclusion from trading.” 17 CFR 242.300(a).
[3] An organization, association, or group of persons that meets the definition of exchange pursuant to Section 3(a)(1) of the Exchange Act and Rule 3b-16 thereunder must register, pursuant to Section 5 of the Exchange Act, as a national securities exchange under Section 6 of the Exchange Act. Exchange Act Rule 3a1-1(a)(2) exempts from the definition of “exchange” under Section 3(a)(1) an organization, association, or group of persons that is in compliance with Regulation ATS Rules 300-304. 17 CFR 240.3a1-1(a)(2).
[4] 17 CFR 242.300-303.
[5] 17 CFR 242.304.
[6] 17 CFR 242.301(b)(5).
[7] 17 CFR 242.301(b)(5)(ii)(A)-(B). See also Regulation ATS Adopting Release, supra note 1, at 70872-74.
[8] Pursuant to Exchange Act Rule 600(b), an NMS stock is any NMS security other than an option. 17 CFR 242.600(b)(48). 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 for reporting transactions in listed options.” 17 CFR 242.600(b)(47).
[9] 15 U.S.C. 78c(a)(11); 17 CFR 240.3a1-1. Examples of equity securities that are not NMS stocks include options and limited partnerships. See Regulation ATS Adopting Release, supra note 1, at 70873 n.246.
[10] The term “municipal securities” means securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States, or any security which is an industrial development bond (as defined in Section 103(c)(2) of Title 26) the interest on which is excludable from gross income under Section 103(a)(1) of Title 26 if, by reason of the application of paragraph (4) or (6) of Section 103(c) of Title 26 (determined as if paragraphs (4)(A), (5), and (7) were not included in such Section 103(c)), paragraph (1) of such section 103(c) does not apply to such security. 15 U.S.C. 78c(a)(29).
[11] Rule 300(i) provides that the term corporate debt security means any security that: (1) evidences a liability of the issuer of such security; (2) has a fixed maturity date that is at least one year following the date of issuance; and (3) is not an exempted security, as defined in Section 3(a)(12) of the Exchange Act. 17 CFR 242.300(i).
[12] 17 CFR 242.301(b)(5)(i).
[13] Information on the aggregate trading in municipal securities can be obtained from the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website (“EMMA”). See also Regulation ATS Adopting Release, supra note 1, at 70873.
[14] Information on the aggregate trading in corporate debt securities can be obtained from FINRA’s Trade Reporting and Compliance Engine (“TRACE”).
[15] In the Regulation ATS Adopting Release, the Commission stated that “an alternative trading system subject to Regulation ATS [must] comply with fair access requirements if, during at least 4 of the preceding 6 months, the alternative trading system accounted for twenty percent or more of the average daily share volume in any equity security or certain categories of debt (emphasis added). Id. at 70874.
[16] Obligations of an NMS Stock ATS to amend its Form ATS-N if the NMS Stock ATS meets or exceeds the volume threshold under Rule 301(b)(5)(i) are governed by Rule 304(a)(2)(i)(D). See 17 CFR 242.304(a)(2)(i)(D).
[17] An ATS subject to the Fair Access Rule must also preserve for at least 3 years, the first 2 years in an easily accessible place, all documents required by Rule 301(b)(5)(ii). 17 CFR 242.303(a)(1)(iii). The Commission explained in the Regulation ATS Adopting Release that the Commission “expects an alternative trading system to maintain a record of its standards at each point in time. If the alterative trading system amends or modifies its access standards, the records kept should reflect historic standards, as well as current standards.” See Regulation ATS Adopting Release, supra note 1, at 70873 n.251.
[18] 17 CFR 242.301(b)(5)(ii)(A)-(D).
[19] 17 CFR 242.301(b)(5)(i)(C) and (D).
[20] See Regulation ATS Adopting Release, supra note 1, at 70874.
[21] See id.
[22] The Commission provided an example of when an ATS subject to the Fair Access Rule may limit its services to permissioned subscribers stating “[i]n addition, an alternative trading system could allow institutional subscribers the option of refusing to trade with broker-dealer subscribers, as long as the alternative trading system grants this option to subscribers based on objective and fairly applied standards.” Id. The Commission also stated in the Regulation NMS Stock ATS Adopting Release that “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 adopted written standards and applied them in a fair and non-discriminatory manner.” See Regulation NMS Stock ATS Adopting Release, supra note 1, at 38841 n. 862.
[23] See Regulation ATS Adopting Release, supra note 1, at 70874.
[24] 17 CFR 242.301(b)(5)(iii).
