United States: Trade Reporting: SEC Approves FINRA Rule Requiring Alternative Trading Systems To Report Activity Weekly

US-registered broker-dealers that operate Alternative Trading Systems will have to report volume information, by security, to FINRA weekly. The first report, for the week of May 12, 2014, is due May 28, 2014. ATS will, by November, require their own separate Market Participant Identifier (or "MPID").

INTRODUCTION

Summary of New Rules

On January 17, 2014, the US Securities and Exchange Commission ("SEC") voted to approve a FINRA rule proposal that significantly changes the regulatory landscape for broker-dealers that operate as alternative trading systems, or ATSs.1

The rule changes cumulatively require each ATS to report weekly volume information and number of securities transactions, by security, and also require broker-dealers operating as ATSs to acquire and use a single, unique market participant identifier ("MPID") when reporting information to FINRA.

Effective Date of May 2014 for the New Reports

The ATS reporting requirement will be implemented beginning May 12, 2014. The first ATS reports for the week of May 12 through May 16, 2014, will then be due by May 28, 2014.

Each ATS must begin reporting order and trade information to FINRA using a unique MPID by November 10, 2014.

SUMMARY OF NEW FINRA RULES

The new FINRA rules create a significant new regulatory reporting requirement for ATSs.

Reporting Requirement

Under new FINRA Rule 4552, each ATS must report to FINRA its total (i.e., aggregate) weekly volume information and number of trades, by security, in both equity and fixed-income securities, provided that such securities are subject to trade-reporting requirements.2 The trading information with respect to any week must be filed with FINRA within seven business days following the end of each week.

FINRA will make the reported information for equity securities publicly available on a delayed basis. Specifically, FINRA will publish the trading information reported for certain equity securities after a minimum delay of two weeks (for NMS stocks in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility) and after a minimum delay of four weeks for other equity securities.3

Under the rule, an ATS must include only those trades executed "within the ATS," and not those transactions routed outside the ATS.4 The FINRA Regulatory Notice describing the new rule explains that volume is considered to be "within an ATS" for purposes of Rule 4552 if the ATS (i) executes the trade; (ii) is considered the "executing party" to the trade under FINRA rules; or (iii) otherwise matches orders constituting the trade in a manner as contemplated by SEA Rule 3b-16 or SEC Regulation ATS.5 The Regulatory Notice states:

"For example, a trade would be considered to have occurred 'within an ATS' for purposes of Rule 4552 if the ATS uses established, non-discretionary methods under which orders interact with each other, and the buyers and sellers entering the orders agree to the terms of the trade. The Supplementary Material [found in the Rule] notes that this standard would include, but not be limited to: any trade executed as a result of the ATS bringing together the purchaser and seller on or through its system; any trade executed by the ATS's subscribers where the subscribers used the ATS to negotiate the trade, even if the ATS did not itself execute the trade; or any trade in which the ATS takes either side of a trade for clearing or settlement or in any other way inserts itself into a trade (e.g., exchanging securities or funds on behalf of one or both subscribers taking part in the trade)."6

Use of a Market Participant Identifier ("MPID")

The SEC concurrently approved amendments to FINRA's rules relating to the use of Market Participant Identifiers, or MPIDs, that require each broker-dealer operating an ATS to obtain a MPID for each ATS that it operates. The ATS MPID must be used to make the reports required by Rule 4552, and must use the ATS MPID for any other transaction reporting required in respect of such transactions (for example, TRACE reports).

SUMMARY OF ATS REGULATION AND CORRESPONDING E.U. REGULATION

Exchange Regulation and the Emergence of ATS

Under the Securities Exchange Act, an "exchange" is defined as

"any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange."7

Over time, technology has made it easier for securities market participants, such as broker-dealers, to create automated systems that bring together purchase and sale interest across a wide range of securities and non-securities products. As a result of these technological changes, in 1998, the SEC adopted Regulation ATS and corresponding Rule 3a1-1.8

Regulation ATS

Rule 300(a) of Regulation ATS defines an ATS as:

  1. [...] any organization, association, person, group of persons, or system:

    1. That constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of § 240.3b-16 of this chapter; and
    2. That does not:

      1. Set rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system; or
      2. Discipline subscribers other than by exclusion from trading.

Regulation ATS has three basic rules governing ATS activity:

  • Rule 301, which requires virtually all ATSs to register as broker-dealers; to file Form ATS with the SEC; to grant execution access to national exchanges; in certain circumstances, to provide fair access to subscribers in accordance with objective access criteria; and, in certain circumstances, to establish and test systems capacity, processing, vulnerability, and disaster recovery standards.
  • Rule 302, which creates detailed record-keeping requirements for ATSs.
  • Rule 303, which sets the record preservation requirements for ATSs.

European Regulation of Multilateral Trading Facilities

In Europe, multilateral trading facilities (MTFs) are regulated under the Markets in Financial Instruments Directive (Directive 2004/39/EC, "MiFID"). The current MiFID imposes various pre-trade and post-trade reporting obligations on users and operators of MTFs in relation to EU listed shares. These include an obligation to make public bid and offer prices advertised through an MTF's systems and to publicly report the price, volume and time of actual transactions. Proposed new rules under MiFID II / MiFIR will extend similar rules to all financial products (subject to exemptions, if granted). The definition of trading systems covered by such requirements will also be extended through the new concept of "organised trading facilities".

CONCLUSION

The adoption of Rule 4552 by FINRA represents a significant increase in the regulatory burdens placed on broker-dealers that operate ATSs. This is due not only to the technological requirements that must be met in order to make the required reports, but also because FINRA will undoubtedly analyze the collected data in a manner similar to its use of trade reporting data—meaning that member firms that make reports of ATS data will receive inquiries from FINRA both regarding the substance of the reports, and regarding any perceived reporting errors that are discovered.

Footnotes

1 See SEC Release 34-71341, "Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, to Require Alternative Trading Systems to Report Volume Information to FINRA and to use Unique Market Participant Identifiers," January 17, 2014. SEC releases are available at the SEC's website, www.sec.gov.

2 Specifically, reporting is required for any NMS stock, OTC Equity Security, and any debt security subject to FINRA's Trade Reporting and Compliance Engine (TRACE) rules (i.e., "TRACE-eligible" securities). Note that reporting securities in accordance with FINRA Rule 4552 does not exempt the reporting ATS from applicable trade reporting rules in respect of the same transactions.

3 So-called "Tier 1" NMS stocks include NMS stocks that form part of the S&P 500 Index, the Russell 1000 Index, and certain exchange-traded products.

4 Under Rule 4552(c), if two orders are crossed by the ATS, the volume reported would include only the number of shares or par value of bonds crossed as a single trade (e.g., crossing a buy order of 1,000 shares with a sell order of 1,000 shares would be calculated as a single trade of 1,000 shares of volume). FINRA also notes that an ATS should report only one side of a transaction in order to avoid double-counting.

5 See FINRA Regulatory Notice 14-07, "Alternative Trading Systems" ("Regulatory Notice 14-07"). FINRA Regulatory Notices are available on FINRA's website, www.finra.org.

6 See Regulatory Notice 14-07 at page 3.

7 See Securities Exchange Act Section 3(a)(1). See also Rule 3b-16 under the Securities Exchange Act, which provides interpretive guidance regarding certain components of the definition found in Section 3(a)(1).

8 Rule 3a1-1 states that an organization that would otherwise come within the definition of an "exchange" will not be required to register with the SEC as an exchange, provided that such organization operates in accordance with Regulation ATS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions