Trade Reporting Exemptions for Alternative Trading Systems

An alternative trading system that merely brings two member subscribers together, without touching the trade, can ask to be relieved of the reporting obligation. The relief is narrow, conditional, and paid for with published volume data.

Who Can Grant an Exemption, and on What Terms?

FINRA staff, for good cause shown after taking into consideration all relevant factors, may exempt a member alternative trading system (ATS) from the trade reporting obligation, upon application and subject to specified terms and conditions, if the exemption is consistent with the protection of investors and the public interest.

Two versions of that rule exist. One reaches the reporting obligation at the Alternative Display Facility and both Trade Reporting Facilities; the other reaches the obligation at the OTC Reporting Facility.

Staff will grant an exemption only if all of the criteria below are satisfied.

Exam Tip: Gotchas

• The exemption is discretionary even when every criterion is met. The rule says staff may exempt, for good cause shown, and only where the exemption is consistent with the protection of investors and the public interest.
• Nothing here happens automatically. An exemption arrives only upon application, and it comes subject to specified terms and conditions.

What Are the Five Criteria?

1. Trades are between ATS subscribers that are both FINRA members.
2. The system demonstrates the four operational facts in the next section.
3. The system and the member subscribers acknowledge and agree in writing that the system shall not be deemed a party to the trade for trade reporting purposes, and that trades shall be reported by the member subscriber that, as between the two, would satisfy the definition of executing party.
4. The system agrees to provide FINRA, on a monthly basis or such other basis as FINRA prescribes, data relating to the volume of trades by security executed by its member subscribers using its system, and acknowledges that failure to report that data will result in revocation of any exemption, in addition to constituting a violation of FINRA rules.
5. The system provides FINRA with a link to a public website carrying its trading information, at no charge and in a substantially similar format to what FINRA publishes, on the timeframes below.

Exam Tip: Gotchas

• Both sides of the trade must be FINRA members. A trade between a member subscriber and a non-member subscriber is outside the first criterion entirely.
• Failing the data undertaking has two consequences, not one. It violates FINRA rules and it results in revocation of the exemption.

What Must the Exempt System Demonstrate About Its Operation?

The second criterion holds four demonstrations, and all four have to be true:

• The member subscribers are fully disclosed to one another at all times on the system.
• The system does not permit automatic execution, and a member subscriber must take affirmative steps beyond the submission of an order to agree to a trade with another member subscriber.
• The trade does not pass through any account of the system, and the system does not in any way hold itself out to be a party to the trade.
• The system does not exchange shares or funds on behalf of the member subscribers, take either side of the trade for clearing or settlement purposes, including but not limited to at The Depository Trust Company (DTC) or otherwise, or in any other way insert itself into the trade.

Exam Tip: Gotchas

• Submitting an order is not agreeing to a trade here. The system must require affirmative steps beyond order submission, which is why an automatic execution venue cannot qualify.
• The clearing prohibition is written with an open example. Taking either side for clearing or settlement is barred including but not limited to at The Depository Trust Company, so another venue does not save it.

What Must the System Publish, and When?

The fifth criterion requires a public website, at no charge, in a substantially similar format to the trading information FINRA publishes, on these timeframes:

"ATS Trading Information" is defined as two data points: the number of shares, and the number of trades, in each such security executed within the system or executed by the system's member subscribers using its system.

The Supplementary Material adds three rules for calculating and posting that volume:

• The system shall include only those trades executed by its member subscribers using its system.
• If two orders are crossed by the system, the volume shall include only the number of shares crossed as a single trade. Crossing a buy order of 1,000 shares with a sell order of 1,000 shares is calculated as a single trade of 1,000 shares of volume.
• To meet the substantially similar format requirement, the data must include the same data elements for the same timeframes, be accessible in the same manner as FINRA makes data available, and include data for the same time periods, including current and historical data.

Exam Tip: Gotchas

• The system's own clocks read "no later than" while FINRA's read "no earlier than". The exempt system faces a deadline; FINRA's publication rule sets an earliest release instead.
• A cross is one trade, not two. Volume counts the shares crossed as a single trade, so counting both sides overstates the figure.

Who Reports the Trade Instead?

Where FINRA has granted an exemption, trades shall be reported to FINRA by the member subscriber that, as between the two member subscribers, satisfies the definition of "executing party" under the relevant reporting rule.

The exemption therefore moves the obligation from the system to a subscriber. It does not remove the trade from reporting to FINRA.

Exam Tip: Gotchas

• An exemption is a transfer, not a release. The trade still reaches FINRA, reported by the member subscriber that satisfies the executing party definition.

When Is a Trade Executed "Within" an Alternative Trading System?

For calculating and posting volume, a trade is considered executed within an alternative trading system if the system meets any one of three branches:

1. The system executes the trade.
2. The system is considered the "executing party" to the trade under FINRA rules.
3. The system otherwise matches orders constituting the trade in a manner contemplated by the exchange functions definition rule, or by Regulation ATS.

The examples the rule gives are open, reading "including, but not limited to":

• Any trade executed as a result of the system bringing together the purchaser and seller on or through its systems.
• Any trade executed by the system's subscribers where the subscribers used the system to negotiate the trade, even if the system did not itself execute it.
• Any trade in which the system takes either side for clearing or settlement, or in any other way inserts itself, for example by exchanging securities or funds on behalf of one or both subscribers.

Two limits sit in the same Supplementary Material:

• Where the system routes an order to another member firm or other execution venue for handling or execution, and that initial order matches against interest resident at the other venue, the system would not be considered the executing party and would not include that volume for reporting purposes.
• A trade continues to be considered executed within the system for this calculation even if the system has been granted an exemption from its trade reporting obligations.

Exam Tip: Gotchas

• Negotiation inside the system counts even without execution there. A trade the subscribers negotiated using the system is executed within it for volume purposes.
• The exemption does not shrink the volume figure. A trade stays within the system for this calculation even after the exemption is granted.

What Should You Check on Exam Day?

• Confirm both subscribers are FINRA members before considering any of the other criteria.
• Check for automatic execution in the fact pattern; a venue that executes automatically cannot demonstrate the affirmative-steps requirement.
• Confirm the system takes no side for clearing or settlement and exchanges no shares or funds for its subscribers.
• Read a posting deadline as "no later than", against FINRA's own publication clocks, which read "no earlier than".
• Confirm an exempt system's trade still reaches FINRA, reported by the member subscriber that is the executing party.