Alternative Trading Systems
[Draft] Understanding Dark Pool trading and data and why it exists
Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws (United States of America)
Summarizer: Alternative Trading System (ATS)
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 the exemption provided under Exchange Act Rule 3a1-1(a). To operate under this exemption, an ATS must comply with the requirements set forth in Rules 300-303 of Regulation ATS.
Dark Pool prints?
Dark pools are a type of alternative trading system (ATS) for non-exchange trading that is continuously growing. The ability to trade Dark Pools was created so that high capital/institutional buyers and sellers could trade large blocks of shares without causing the market to react against them. By allowing these large traders to execute these trades off the exchange, large price swings and market dislocation are avoided.
What is the purpose of a Dark Pool?
A Dark Pool allows institutional investors to execute a large size trade while avoiding potential downward pressure caused by other investors. In a traditional exchange/market structure, this individual would have to execute this large trade over many small trades leaving open the possibility for price to change in-between the many small trades placed. Dark Pool trades can avoid this price dislocation in-between orders because order books are non-existent in these alternative trading systems. The Dark Pools allow institutional traders to execute trades with much larger sizes allowing them to receive better-priced purchases and sales than they would in a traditional market structure.
🇺🇸 #3 May 31, 2023
Letter wars: SEC's proposed changes get thousands of pros, cons »
bloomberg.com: [Transcription] [Excerpts] The burning question now: How does the SEC measure the massive show of individual opinion against the industry?
Notably, only one letter suggested a temporary pilot program would be an effective evaluation tool. Instead many firms urge implementation of changes to Rule 605 or the market data infrastructure rule, then re-evaluating market conditions, liquidity and trading costs to see if more changes are needed.
🇺🇸 #2 Apr 11, 2023
US Department of Justice raises antitrust concerns over SEC equity market structure proposals (pdf) »
justice.gov (AntiTrust Division): In a letter to the SEC, the Antitrust Division of the US Department of Justice (DOJ) expressed it views on the SEC’s proposed rules on:
the disclosure of order execution information (Rule 605 Proposal);
setting minimum pricing increments, access fees, and transparency requirements (Regulation NMS Proposal);
competition for certain orders (Order Competition Proposal);
setting forth best execution requirements for certain market participants (Best Execution Proposal).
COMMENT OF
THE ANTITRUST DIVISION OF
THE UNITED STATES DEPARTMENT OF JUSTICE
🔹Continue reading (pdf)
🇺🇸 #1 Dec 14, 2022
SEC Proposals related to Market Structure »
sec.gov: The Securities and Exchange Commission during an open meeting on December 14 proposed four separate rulemakings related to market structure:
Files related (SEC Rulemaking Index):
(S7-32-22) 34-96946 Reg Best Execution1
(S7-31-22) 34-96495 Order Competition Rule2
(S7-30-22) 34-96494 Reg NMS: min price increments, access fees, etc.3
(S7-29-22) 34-96493 Disclosure of Order Execution Information ✅
🔹Press Release | Fact Sheet | Comments
*The public comment period will remain open until March 31, 2023, or until 60 days after the date of publication of the proposing release in the Federal Register, whichever is later.⚠️ Work in progress
SEC4 Division of Trading and Markets
Division of Trading and Exchange (1935 – 1947)
Division of Trading and Exchanges (1948 – 1962)
Division of Trading and Markets (1963 – 1971)
Division of Market Regulation (1972 – November 2007)
Division of Trading and Markets (from November 2007) » Markets:
Supervises major market participants and conducts activities to maintain fair, orderly, and efficient standards that foster investor protection and confidence in the markets.
❌ Over-the-Counter Markets
“Alternative Trading System” vs “ECNs” by Joel Hasbrouck (Securities Trading: Principles and Procedures, Chapter 18) 5/02/18
[Transcription] A market that registers as an ATS has a sliding scale of requirements based on trading volume.
A small ATS must only:
1. file a notice of operation and quarterly reports;
2. keep an audit trail of transactions
3. refrainfromcallingitselfan“exchange,”“stockmarket,” or similar
Most dark pools are registered as ATSs. An Alternative Trading System (ATS) is a place where trades can be executed.
*An electronic communications network (ECN) is a market center (trading venue) that has visible bid and ask quotes.
*Dark pools are ATSs, but they are not ECNs.
*Everyone had to report trades.❑ Exchanges generally displayed their quotes (bids and asks) publicly.▪But many ECNs displayed their quotes selectively.
*Exchanges, ECNs and ATSs could restrict access.
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🇺🇸 2005
Rule 305
work in progress
🇺🇸 2000
SEC Final Rules »
sec.gov: SEC Final Rules
Rules 11Ac1-5 and 11Ac1-6 introduced. Effective date: Jan, 30, 2001 (Release no. 34-43590)
Exchange Act Rule 11ac-5 (Disclosure of Order Execution Information): “Member obligations to provide statistical information about order executions”
Exchange Act Rule 11Ac1-6 (Disclosure of Order Routing Information):
Rule 11Ac1-6 introduced.
In November 2000, the Commission adopted Exchange Act Rule 11Ac1-6 ("Rule") link: https://www.sec.gov/interps/legal/mrslb13.htm#P28_1097
🇺🇸 1998
Reg ATS »
sec.gov: SEC Proposed Rules. Regulation of Exchanges and Alternative Trading Systems (ATS)
🔹SEC Proposed Rules: 1998 ⇢ Rel. No. 34-39884; File No. S7-12-98
In April 1998, the Commission proposed a new regulatory framework for alternative trading systems.
Comments (#24) | Selected comments:
(11-23-98): Wellington Management Company, LLP mcclosk1.txt
(08-28-98): Bloomberg L.P. ecclest1.htm
(08-03-98): Instinet Corp. atkin1.txt
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🔹SEC Final Rules: 1998 ⇢ Release no. 34-40760; File No. S7-12-98 ✅
In December 1998, the Commission created a classification of Alternative Trading Systems (“Regulation ATS”).
Footnotes [1] The term "alternative trading system" is defined in Rule 300(a),17 CFR 242.300(a). This term encompasses some systems that previous Commission releases called:
Proprietary trading systems ("Prop Trading")
Broker-dealers trading systems ("Broker Dealer")
Electronic Communications Networks ("ECNs")
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⚠️ Terminology: ATSs and ECNs by Joel Hasbrouck link
An Alternative Trading System (ATS) is a place where trades can be executed.
An electronic communications network (ECN) is a market center (trading venue) that has visible bid and ask quotes.
Dark pools are ATSs, but they are not ECNs.
🇺🇸 1996
Congress
In 1996, Congress provided the Commission with greater flexibility to regulate new trading systems by giving the U.S. Securities and Exchange Commission broad authority to exempt any person from any of he provisions of the Securities Exchange Act of 1934 ("Exchange Act") and impose appropriate conditions on their operation.
🇺🇸 1995
National Market System
proposed/mandated a network of “National Securities Exchanges” for trading stocks, bonds and other securities.
🇺🇸 1975
Securities Act Amendments of 1975
(Digitized for FRASER - Congressional documents: Public Law 94-29, 94th Congress, S. 249)
An Act to Amend the Securities Exchange Act of 1934 to Remove Barriers to Competition, to Foster the Development of a National Securities Market System and a National Clearance and Settlement System, to Make Uniform the Securities and Exchange Commission's Authority Over Self-Regulatory Organizations, to Provide for the Regulation of Brokers, Dealers and Banks Trading in Municipal Securities, to Facilitate the Collection and Public Dissemination of Information Concerning the Holdings of and Transactions in Securities by Institutional Investment Managers, and for Other Purposes
🇺🇸 1934
Securities Exchange Act of 1934
(Digitized for FRASER - Congressional documents: Public Law 73-291, 73d Congress, H.R. 9323)
An Act to Provide for the Regulation of Securities Exchanges and of Over-the-Counter Markets Operating in Interstate and Foreign Commerce and Through the Mails, to Prevent Inequitable and Unfair Practices on Such Exchanges and Markets, and for Other Purposes
🫵🫵🫵🫵
Part 2425 Regulations M, SHO, ATS, AC, and NMS and Customer Margin Requirements for Security Futures-------f-g-g-g-f-f----
/
Work in progress-
Proposed Regulation Best Execution, which would establish through Commission rules a best execution regulatory framework for brokers, dealers, government securities brokers, government securities dealers, and municipal securities dealers. While a best execution rule was first established in 1968 by the National Association of Securities Dealers, the predecessor to the Financial Industry Regulatory Authority, the proposed rule, if adopted, would create the first SEC-established rule concerning best execution: https://www.sec.gov/news/press-release/2022-226
The Commission also proposed a rule that would require certain orders of individual investors to be exposed to competition in fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition: https://www.sec.gov/news/press-release/2022-225
Another Commission proposal would amend certain rules under Regulation NMS to adopt variable minimum pricing increments, or “tick sizes,” for the quoting and trading of NMS stocks, reduce access fee caps for protected quotations, and accelerate the transparency of the best priced orders available in the market. The proposed amendments are designed to enhance trading opportunities for all investors and to help ensure that orders placed in the national market system reflect the best prices available for all investors: https://www.sec.gov/news/press-release/2022-224
SEC Financial Report 2022 (FY 2022 Agency Financial Report - November 10, 2022)
Celebrating 20 years of the “Sarbanes-Oxley Act of 2002”
Organizational Structure and Resources
Financial Highlights and more
Code of Federal Regulations (eCFR): https://www.ecfr.gov/current/title-17/chapter-II/part-242
The Code of Federal Regulations (CFR) is the official legal print publication containing the codification of the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government. The Electronic Code of Federal Regulations (eCFR) is a continuously updated online version of the CFR. It is not an official legal edition of the CFR.
Learn more about the eCFR, its status, and the editorial process.