Quick Answer
An alternative trading system (ATS) must meet eleven requirements unless it falls within one of five exclusions. It registers as a broker-dealer, files notice on the prescribed form, keeps and preserves records, reports quarterly, protects confidential trading information, and may not use the word exchange in its name.
Regulation ATS works in two steps. The scope paragraph asks whether the venue is covered at all, and the requirements paragraph then lists what a covered venue owes. Several of the requirements fire only above a volume threshold, so a small venue carries far less than a large one.
When Does the Rule Not Apply?
An alternative trading system (ATS) complies with the requirements unless it falls within one of five exclusions.
- It is registered as an exchange under the national securities exchange registration provision.
- It is exempted by the SEC from registration as an exchange based on the limited volume of transactions effected.
- It is operated by a national securities association.
- It is a registered broker-dealer, or a bank, and limits its securities activities to four named instrument categories.
- It is exempted, conditionally or unconditionally, by SEC order, after application by the alternative trading system, from one or more of the requirements or of the separate filing rule for national market system (NMS) stock venues.
The four instrument categories in the fourth exclusion are government securities; repurchase and reverse repurchase agreements solely involving those government securities; any put, call, straddle, option or privilege on a government security, other than one traded on one or more national securities exchanges or for which quotations are disseminated through an automated quotation system a registered securities association operates; and commercial paper.
Exam Tip: Gotchas
- The fourth exclusion reaches a bank as well as a broker-dealer. A bank running a government securities matching platform can sit outside the requirements.
- An order-based exemption can be partial. The rule allows exemption from one or more of the requirements, not only from all of them.
What Are the Eleven Requirements?
Three of them, order display and execution access, fair access, and systems capacity, attach only above a volume threshold, and the lesson on display, fair access and systems capacity duties covers those three together with the fee restriction that follows the first. The recordkeeping requirement is covered in the lesson on recordkeeping and record preservation.
| Requirement | What it demands |
|---|---|
| Broker-dealer registration | Register as a broker-dealer under the broker-dealer registration statute |
| Notice | File an initial operation report on Form ATS, plus the amendments and cessation report described below |
| Order display and execution access | Above the display threshold, provide the best-priced orders to an exchange or association and equivalent execution access |
| Fees | Charge no fee inconsistent with that equivalent access, and none contrary to a consistency rule the exchange or association has established |
| Fair access | At 5 percent or more of volume in a named category, adopt written access standards, keep records, and report on Form ATS-R |
| Capacity, integrity and security | At 20 percent or more of volume in municipal or corporate debt securities, meet seven systems standards |
| Examinations, inspections and investigations | Permit examination and inspection of its premises, systems and records, and cooperate with the examination, inspection or investigation of subscribers by the SEC or by a self-regulatory organization of which the subscriber is a member |
| Recordkeeping | Make and keep current the records the Regulation ATS recordkeeping rule lists, and preserve the records the Regulation ATS record preservation rule lists |
| Reporting | File the quarterly and cessation reports described below |
| Confidential trading information | Establish adequate written safeguards and written procedures, which shall include limiting access to employees operating the system or responsible for its compliance with these or any other applicable rules, and standards controlling employee trading for their own accounts, plus written oversight procedures |
| Name | Do not use in its name the word exchange, or derivations of it such as the term stock market |
Exam Tip: Gotchas
- The confidential information list is a floor. The rule says the safeguards and procedures shall include those two items, so a venue may need more.
- The examination duty covers subscribers as well as the venue. The venue must cooperate with the examination, inspection or investigation of a subscriber, whether conducted by the SEC or by a self-regulatory organization of which that subscriber is a member.
- The name prohibition reaches derivations. Stock market is the example the rule itself gives.
What Are the Notice and Reporting Deadlines?
| Filing | Deadline |
|---|---|
| Initial operation report on Form ATS | At least 20 days prior to commencing operation |
| Amendment on Form ATS for a material change to the operation | At least 20 calendar days prior to implementing it |
| Amendment correcting information in the initial operation report that has become inaccurate and has not already been reported in an amendment | Within 30 calendar days after the end of each calendar quarter in which the venue operated |
| Amendment correcting information that was inaccurate when filed | Promptly after discovery |
| Cessation of operations report | Promptly upon ceasing to operate |
| Quarterly report on Form ATS-R, filed separately for NMS stocks and for other securities | Within 30 calendar days after the end of each calendar quarter the market operated |
| Form ATS-R on ceasing to operate, likewise filed separately | Within 10 calendar days after ceasing to operate |
Duplicate originals of the notice filings, from the initial operation report through the cessation report, must be filed with the surveillance personnel designated as such by any self-regulatory organization that is the venue's designated examining authority, simultaneously with the filing with the SEC. Duplicates of the reports the reporting requirement demands go to those surveillance personnel upon request.
All reports filed under the notice requirement and the reporting requirement are deemed confidential when filed.
An NMS Stock ATS files Form ATS-N under the separate filing rule for such venues instead. An alternative trading system that trades both NMS stocks and securities other than NMS stocks is subject to that separate rule with respect to the NMS stocks and to the notice requirement with respect to the non-NMS stocks.
Exam Tip: Gotchas
- The two correcting amendments run on different clocks. Information in the initial operation report that later becomes inaccurate and has not already been amended is corrected quarterly; information that was inaccurate when filed is corrected promptly on discovery.
- A mixed venue files under both regimes at once. The split is by instrument, not by choosing one route for the whole business.
- The quarterly and cessation reports are filed separately for the two instrument groups. One combined filing does not satisfy the requirement.
What Should You Check on Exam Day?
- Check the scope paragraph first, because a bank or broker-dealer limited to government securities, those repurchase agreements, government security options and commercial paper is outside the requirements.
- Separate the two correcting amendments, one quarterly and one prompt on discovery of an error made when filing.
- Confirm a mixed venue files under the NMS Stock ATS rule for NMS stocks and the notice requirement for everything else.
- Treat the confidential trading information list as a floor, because the rule says the safeguards shall include those items.