Display, Fair Access and Systems Capacity Duties

A small matching venue owes far less than a large one. Three duties in Regulation ATS are conditional on volume, and each is measured over at least 4 of the preceding 6 calendar months. Reading the trigger correctly matters more than reciting the duty.

When Must an ATS Display Its Best Orders to the Public Quote?

The order display and execution access duty attaches to a national market system (NMS) stock in which the alternative trading system (ATS) does both of two things.

1. Displays subscriber orders to any person other than employees of the alternative trading system.
2. During at least 4 of the preceding 6 calendar months, had an average daily trading volume of 5 percent or more of the aggregate average daily share volume for that NMS stock as reported by an effective transaction reporting plan.

The venue then provides to a national securities exchange or a national securities association the prices and sizes of the orders at the highest buy price and the lowest sell price for that stock, displayed to more than one person in the system.

Those prices and sizes go for inclusion in the quotation data the exchange or association makes available to vendors under the quotation rule. The destination is the public quote, not a private feed.

Exam Tip: Gotchas

• Both elements must hold before the duty attaches. A venue at or above 5 percent that displays orders only to its own employees does not owe the display obligation.
• The displayed prices go into the public quotation data. The venue supplies them for inclusion in what the exchange or association makes available to vendors.
• Only the top of the venue's book travels. The duty covers the highest buy price and the lowest sell price, not the full depth.

What Execution Access Must Accompany a Displayed Order?

For any order the venue displays that way, it must give any broker-dealer that has access to the exchange or association concerned the ability to effect a transaction with those orders.

That ability must be equivalent to the broker-dealer's ability to effect a transaction with other orders displayed on the exchange or by the association.

It must also be at the price of the highest priced buy order or lowest priced sell order displayed, for the lesser of two amounts: the cumulative size of those priced orders entered at that price, or the size of the execution the broker-dealer seeks.

On fees, the venue shall charge no fee to broker-dealers accessing it through the exchange or association that is inconsistent with that equivalent access.

Where the exchange or association has established rules designed to assure consistency with its own quotation access standards, the venue shall also charge no fee to members that is contrary to, that is not disclosed in the manner those rules require, or that is inconsistent with any standard of equivalent access those rules establish.

Exam Tip: Gotchas

• The execution size is the lesser of two numbers. It is the cumulative size at that price or the size the broker-dealer seeks, whichever is smaller.
• The fee restriction has three separate failings. A fee can be contrary to a consistency rule, not disclosed the way it requires, or inconsistent with its equivalent access standard.
• The second fee limb applies only where consistency rules exist. Absent such rules the venue is measured against the equivalent access requirement alone.

What Triggers Fair Access, and What Triggers Systems Capacity?

The two triggers differ in both the percentage and the instruments they reach, and each is measured over at least 4 of the preceding 6 calendar months.

Exam Tip: Gotchas

• A venue trading only NMS stocks never trips the systems capacity trigger. That trigger reaches municipal securities and corporate debt securities only.
• The non-NMS equity category is measured by the reporting organization. Volume there is calculated by the self-regulatory organization to which the transactions are reported, not by a plan.
• The measurement window is the same for both duties. At least 4 of the preceding 6 calendar months applies to each trigger.

What Does a Venue Over the Fair Access Threshold Owe?

Four duties follow.

1. Establish written standards for granting access to trading on its system.
2. Not unreasonably prohibit or limit any person in respect to access to the services it offers, by applying those standards in an unfair or discriminatory manner.
3. Make and keep records of all grants of access, including for all subscribers the reasons for granting access, and of all denials or limitations of access with the reasons, for each applicant, for denying or limiting access.
4. Report the required information on Form ATS-R regarding grants, denials, and limitations of access.

Exam Tip: Gotchas

• The standards must be written before they are applied. The rule requires established written standards, then measures the application of those standards for unfairness.
• Records are kept for grants as well as refusals. The reasons must be recorded for all subscribers granted access, not only for applicants turned away.

What Does a Venue Over the Systems Threshold Owe?

The duties apply with respect to those systems that support order entry, order routing, order execution, transaction reporting, and trade comparison. There are seven of them.

1. Establish reasonable current and future capacity estimates.
2. Conduct periodic capacity stress tests of critical systems, to determine the system's ability to process transactions in an accurate, timely and efficient manner.
3. Develop and implement reasonable procedures to review and keep current its system development and testing methodology.
4. Review the vulnerability of its systems and data center computer operations to internal and external threats, physical hazards and natural disasters.
5. Establish adequate contingency and disaster recovery plans.
6. On an annual basis, perform an independent review of its controls for meeting the first five duties, in accordance with established audit procedures and standards, and conduct a review by senior management of a report containing the recommendations and conclusions of that independent review.
7. Promptly notify SEC staff of material systems outages and significant systems changes.

Exam Tip: Gotchas

• The duties are scoped to five named system functions. A system supporting none of order entry, routing, execution, transaction reporting or trade comparison is outside the paragraph.
• The independent review does not end with the reviewer. Senior management must review a report containing its recommendations and conclusions.
• The notice duty covers changes as well as failures. Significant systems changes are reported alongside material systems outages.

When Do the Fair Access and Systems Duties Fall Away?

Both duties fall away on the same three conditions, which the rule states identically in each place. All three must hold.

1. The venue matches customer orders for a security with other customer orders.
2. Those customers' orders are not displayed to any person other than employees of the alternative trading system.
3. Those orders are executed at a price for the security that an effective transaction reporting plan disseminates, or derived from such prices.

Exam Tip: Gotchas

• The relief needs a price that is plan-disseminated or derived from those prices. A venue setting its own price internally does not qualify.
• The relief requires customer orders on both sides. A venue matching a customer order against a dealer's own interest falls outside the first condition.
• The same three conditions relieve both duties. There is no separate, easier test for the systems requirements.

What Should You Check on Exam Day?

• On a display question, confirm the venue displays subscriber orders outside its own employees as well as clearing the 5 percent test.
• Match the threshold to the instrument: 5 percent across four categories for fair access, 20 percent for municipal and corporate debt only for systems capacity.
• Take the lesser of the cumulative size at the price and the size the broker-dealer seeks when sizing an execution.
• Check all three relieving conditions, since a price the venue sets itself defeats the third.
• Confirm the independent systems review is annual and reaches senior management as a report.