By Paul Roland, Global Head of Markets & Services, Banks & Brokers, Nasdaq
Alternative Trading Systems (ATSs) in the US already spend a significant amount of resources on regulatory reporting – both internally and on outside legal counsel.
On July 18, 2018, the Securities and Exchange Commission (SEC) amended Regulation ATS to enhance transparency and oversight of ATSs. It did so by introducing a new filing, the Form ATS-N, which will increase the regulatory reporting burden and absorb even more resources. However, ATSs can jump this reporting hurdle more easily by outsourcing the operation of their platform to an expert in running marketplaces. The equities markets have evolved substantially since Regulation ATS became effective in 2000. For starters, there are now many more ATSs, and these platforms are a significant source of liquidity in National Market System (NMS) stocks. According to the SEC, ATSs now account for about 11.4% of the total dollar value traded in NMS stocks1.FINRA estimates that more than 30% of the total NMS volume of shares traded occurs over the counter2, and 54.7 billion shares3 were traded on ATSs in the second quarter of 2018 alone. Moreover, NMS Stock ATSs have been a source of innovation within the US equities markets. They have become more complex and sophisticated, and some platforms now offer features similar to registered national securities exchanges, such as The Nasdaq Stock Market, which are required to be more transparent in their activities.With the SEC’s recent public focus on competition4, ATS operators will likely play a key role in shaping innovation and market structure. To this end, the SEC has introduced a new Form ATS-N to enhance transparency and oversight of the platforms that trade stocks listed on national securities exchanges. Existing NMS Stock ATSs will be required to file a Form ATS-N no earlier than January 7, 2019 and no later than February 8, 2019. As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS will be required to file a Form ATS-N.The disclosures on Form ATS5 are relatively minimal compared to what will need to be disclosed on Form ATS-N in the future. In many ways, the standards of disclosure on the new form are ‘exchange like’. That is, the amount and level of description will look more similar to an exchange’s rulebook than in years past, and similar to a MiFID II disclosure. The effort and expertise to complete the initial operation report on Form ATS-N, along with the hours preparing a cessation of operations report, are not trivial. The requirements on the 20-page Form ATS-N are extensive.6
The SEC estimates that an NMS Stock ATS will spend about 127.4 hours completing the form, about nine hours preparing each amendment to Form ATS-N, and about two hours preparing a notice of cessation. The disclosures on Form ATS-N have been designed to inform market participants about how the ATS operates. They include the order types and market data used on the ATS, fees, the ATS’s execution and priority procedures, and any procedures to segment orders on the ATS.
Market participants will also be able to assess potential conflicts of interest and risks of information leakage arising from the ATS-related activities of the ATS’s broker-dealer operator and its affiliates. Whenever an ATS makes any change to the operation of the platform, including types of securities traded, or the types of subscribers, they must update their Form ATS-N, as they do now on Form ATS. If the number of rule filings that stock exchanges make annually is any comparison, the reporting burden is enormous: exchanges propose dozens of rule changes per year.
Where Experience Meets Outsourcing
To compete in today’s environment, ATSs need to acquire and maintain advanced technology and retain internal and external compliance experts. These costs have put enormous pressure on broker-dealers’ balance sheets, and have left them searching for ways to reduce costs in order to achieve capital efficiency. Some conclude that they cannot meet these demands entirely alone, and it makes sense to investigate outsourcing the operation of their trading platform, including regulatory support, as an alternative to doing it in-house. Ultimately, outsourcing enables ATSs to concentrate their efforts on enhancing core competencies aimed at adding value for clients and generating revenue. Broker-dealers should look for an outsourcer that can support their platform holistically. A partner should be able to provide support services related to operations, compliance, surveillance, supervisory, recordkeeping and reporting obligations.
Nasdaq actively invests in technology and services for bank and broker venues from design and build, to hosting, and throughout all operations. Currently powering 100+ of the world’s market infrastructure organisations, including exchanges, clearinghouses, central securities depositories and regulators, in over 50 countries with end-to-end, mission-critical technology solutions, Nasdaq effectively manages outsourced venues with exchange-grade expectations, both from a technology and regulatory perspective.