Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Rule 301 -- Requirements for Alternative Trading Systems

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1. Scope of section. An alternative trading system shall comply with the requirements in paragraph (b) of this section, unless such alternative trading system:
   
   
   1. Is registered as an exchange under section 6 of the Act;
      
      
   2. Is exempted by the Commission from registration as an exchange based on the limited volume of transactions effected;
      
      
   3. Is operated by a national securities association;
      
      
   4. 1. Is registered as a broker-dealer under sections 15(b) or 15C of the Act, or is a bank, and
         
         
      2. Limits its securities activities to the following instruments:
         
         
         1. Government securities, as defined in section 3(a)(42) of the Act;
            
            
         2. Repurchase and reverse repurchase agreements solely involving securities included within paragraph (a)(4)(ii)(A) of this section;
            
            
         3. Any put, call, straddle, option, or privilege on a government security, other than a put, call, straddle, option, or privilege that:
            
            
            1. Is traded on one or more national securities exchanges; or
               
               
            2. For which quotations are disseminated through an automated quotation system operated by a registered securities association; and
               
               
         4. Commercial paper.
            
            
   5. Is exempted, conditionally or unconditionally, by Commission order, after application by such alternative trading system, from one or more of the requirements of paragraph (b) of this section. The Commission will grant such exemption only after determining that such an order is consistent with the public interest, the protection of investors, and the removal of impediments to, and perfection of the mechanisms of, a national market system.
      
      
2. Requirements. Every alternative trading system subject to this Regulation ATS, pursuant to paragraph (a) of this section, shall comply with the requirements in this paragraph (b).
   
   
   1. Broker-dealer registration. The alternative trading system shall register as a broker-dealer under section 15 of the Act.
      
      
   2. Notice.
      
      
      1. The alternative trading system shall file an initial operation report on Form ATS, in accordance with the instructions therein, at least 20 days prior to commencing operation as an alternative trading system, or if the alternative trading system is operating as of April 21, 1999, no later than May 11, 1999.
         
         
      2. The alternative trading system shall file an amendment on Form ATS at least 20 calendar days prior to implementing a material change to the operation of the alternative trading system.
         
         
      3. If any information contained in the initial operation report filed under paragraph (b)(2)(i) of this section becomes inaccurate for any reason and has not been previously reported to the Commission as an amendment on Form ATS, the alternative trading system shall file an amendment on Form ATS correcting such information within 30 calendar days after the end of each calendar quarter in which the alternative trading system has operated.
         
         
      4. The alternative trading system shall promptly file an amendment on Form ATS correcting information previously reported on Form ATS after discovery that any information filed under paragraphs (b)(2)(i), (ii) or (iii) of this section was inaccurate when filed.
         
         
      5. The alternative trading system shall promptly file a cessation of operations report on Form ATS in accordance with the instructions therein upon ceasing to operate as an alternative trading system.
         
         
      6. Every notice or amendment filed pursuant to this paragraph (b)(2) shall constitute a "report" within the meaning of sections 11A, 17(a), 18(a), and 32(a), and any other applicable provisions of the Act.
         
         
      7. The reports provided for in paragraph (b)(2) of this section shall be considered filed upon receipt by the Division of Market Regulation, Stop 10-2, at the Commission's principal office in Washington, DC. Duplicate originals of the reports provided for in paragraphs (b)(2)(i) through (v) of this section must be filed with surveillance personnel designated as such by any self- regulatory organization that is the designated examining authority for the alternative trading system pursuant to Rule 17d-1 under the Securities Exchange Act of 1934 simultaneously with filing with the Commission. Duplicates of the reports required by paragraph (b)(9) of this section shall be provided to surveillance personnel of such self-regulatory authority upon request. All reports filed pursuant to this paragraph (b)(2) and paragraph (b)(9) of this section shall be deemed confidential when filed.
         
         
   3. Order display and execution access.
      
      
      1. (i) An alternative trading system shall comply with the requirements set forth in paragraph (b)(3)(ii) of this section, with respect to any NMS stock in which the alternative trading system:
         
         
         1. (A) Displays subscriber orders to any person (other than alternative trading system employees); and
            
            
         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 such NMS stock as reported by an effective transaction reporting plan.
            
            
      2. (ii) Such alternative trading system shall provide to a national securities exchange or national securities association the prices and sizes of the orders at the highest buy price and the lowest sell price for such NMS stock, displayed to more than one person in the alternative trading system, for inclusion in the quotation data made available by the national securities exchange or national securities association to vendors pursuant to Rule 242.602.
         
         
      3. (iii) With respect to any order displayed pursuant to paragraph (b)(3)(ii) of this section, an alternative trading system shall provide to any broker-dealer that has access to the national securities exchange or national securities association to which the alternative trading system provides the prices and sizes of displayed orders pursuant to paragraph (b)(3)(ii) of this section, the ability to effect a transaction with such orders that is:
         
         1. (A) Equivalent to the ability of such broker-dealer to effect a transaction with other orders displayed on the exchange or by the association; and
            
         2. (B) At the price of the highest priced buy order or lowest priced sell order displayed for the lesser of the cumulative size of such priced orders entered therein at such price, or the size of the execution sought by such broker-dealer.
            
            
   4. Fees. The alternative trading system shall not charge any fee to broker- dealers that access the alternative trading system through a national securities exchange or national securities association, that is inconsistent with equivalent access to the alternative trading system required by paragraph (b)(3)(iv) of this section. In addition, if the national securities exchange or national securities association to which an alternative trading system provides the prices and sizes of orders under paragraphs (b)(3)(ii) and (b)(3)(iii) of this section establishes rules designed to assure consistency with standards for access to quotations displayed on such national securities exchange, or the market operated by such national securities association, the alternative trading system shall not charge any fee to members that is contrary to, that is not disclosed in the manner required by, or that is inconsistent with any standard of equivalent access established by such rules.
      
      
   5. Fair access.
      
      
      1. (i) An alternative trading system shall comply with the requirements in paragraph (b)(5)(ii) of this section, if during at least 4 of the preceding 6 calendar months, such alternative trading system had:
         
         1. (A) With respect to any NMS stock, 5 percent or more of the average daily volume in that security reported by an effective transaction reporting plan;
            
            
         2. (B) With respect to an equity security that is not an NMS stock and for which transactions are reported to a self-regulatory organization, 5 percent or more of the average daily trading volume in that security as calculated by the self-regulatory organization to which such transactions are reported;
            
            
         3. (C) With respect to municipal securities, 5 percent or more of the average daily volume traded in the United States;
            
            
         4. (D) With respect to investment grade corporate debt, 5 percent or more of the average daily volume traded in the United States; or
            
            
         5. (E) With respect to non-investment grade corporate debt, 5 percent or more of the average daily volume traded in the United States.
            
            
      2. (ii) An alternative trading system shall:
         
         
         1. (A) Establish written standards for granting access to trading on its system;
            
            
         2. (B) Not unreasonably prohibit or limit any person in respect to access to services offered by such alternative trading system by applying the standards established under paragraph (b)(5)(ii)(A) of this section in an unfair or discriminatory manner;
            
            
         3. (C) Make and keep records of:
            
            
            1. (1) All grants of access including, for all subscribers, the reasons for granting such access; and
               
               
            2. (2) All denials or limitations of access and reasons, for each applicant, for denying or limiting access; and
               
               
         4. Report the information required on Form ATS-R (Rule 249.638 of this chapter) regarding grants, denials, and limitations of access.
            
            
      3. (iii) Notwithstanding paragraph (b)(5)(i) of this section, an alternative trading system shall not be required to comply with the requirements in paragraph (b)(5)(ii) of this section, if such alternative trading system:
         
         
         1. (A) Matches customer orders for a security with other customer orders;
            
            
         2. (B) Such customers’ orders are not displayed to any person, other than employees of the alternative trading system; and
            
            
         3. (C) Such orders are executed at a price for such security disseminated by an effective
            transaction reporting plan, or derived from such prices.
            
   6. Capacity, integrity, and security of automated systems.
      
      
      1. (i) The alternative trading system shall comply with the requirements in paragraph (b)(6)(ii) of this section, if during at least 4 of the preceding 6 calendar months, such alternative trading system had:
         
         
         1. (A) With respect to any NMS stock, 20 percent or more of the average daily volume reported by an effective transaction reporting plan;
            
            
         2. (B) With respect to equity securities that are not NMS stocks and for which transactions are reported to a self-regulatory organization, 20 percent or more of the average daily volume as calculated by the self-regulatory organization to which such transactions are reported;
            
            
         3. (C) With respect to municipal securities, 20 percent or more of the average daily volume traded in the United States;
            
            
         4. (D) With respect to investment grade corporate debt, 20 percent or more of the average daily volume traded in the United States; or
            
            
         5. (E) With respect to non-investment grade corporate debt, 20 percent or more of the average daily volume traded in the United States.
            
            
      2. (ii) With respect to those systems that support order entry, order routing, order execution, transaction reporting, and trade comparison, the alternative trading system shall:
         
         
         1. (A) Establish reasonable current and future capacity estimates;
            
            
         2. (B) Conduct periodic capacity stress tests of critical systems to determine such system’s ability to process transactions in an accurate, timely, and efficient manner;
            
            
         3. (C) Develop and implement reasonable procedures to review and keep current its system development and testing methodology;
            
            
         4. (D) Review the vulnerability of its systems and data center computer operations to internal and external threats, physical hazards, and natural disasters;
            
            
         5. (E) Establish adequate contingency and disaster recovery plans;
            
            
         6. (F) On an annual basis, perform an independent review, in accordance with established audit procedures and standards, of such alternative trading system’s controls for ensuring that paragraphs (b)(6)(ii)(A) through (E) of this section are met, and conduct a review by senior management of a report containing the recommendations and conclusions of the independent review; and
            
            
         7. (G) Promptly notify the Commission staff of material systems outages and significant systems changes.
            
            
      3. (iii) Notwithstanding paragraph (b)(6)(i) of this section, an alternative trading system shall not be required to comply with the requirements in paragraph (b)(6)(ii) of this section, if such alternative trading system:
         
         
         1. (A) Matches customer orders for a security with other customer orders;
            
            
         2. (B) Such customers’ orders are not displayed to any person, other than employees of the alternative trading system; and
            
            
         3. (C) Such orders are executed at a price for such security disseminated by an effective transaction reporting plan, or derived from such prices.
            
            
   7. Examinations, inspections, and investigations. The alternative trading system shall permit the examination and inspection of its premises, systems, and records, and cooperate with the examination, inspection, or investigation of subscribers, whether such examination is being conducted by the Commission or by a self-regulatory organization of which such subscriber is a member.
      
      
   8. Recordkeeping. The alternative trading system shall:
      
      
      1. Make and keep current the records specified in Rule 302; and
         
         
      2. Preserve the records specified in Rule 303.
         
         
   9. Reporting. The alternative trading system shall:
      
      
      1. File the information required by Form ATS-R within 30 calendar days after the end of each calendar quarter in which the market has operated after the effective date of this section; and
         
         
      2. File the information required by Form ATS-R within 10 calendar days after an alternative trading system ceases to operate.
         
         
   10. Procedures to ensure the confidential treatment of trading information.
       
       
       1. The alternative trading system shall establish adequate safeguards and procedures to protect subscribers' confidential trading information. Such safeguards and procedures shall include:
          
          
          1. Limiting access to the confidential trading information of subscribers to those employees of the alternative trading system who are operating the system or responsible for its compliance with these or any other applicable rules;
             
             
          2. Implementing standards controlling employees of the alternative trading system trading for their own accounts; and
             
             
       2. The alternative trading system shall adopt and implement adequate oversight procedures to ensure that the safeguards and procedures established pursuant to paragraph (b)(10)(i) of this section are followed.
          
          
   11. Name. The alternative trading system shall not use in its name the word "exchange," or derivations of the word "exchange," such as the term "stock market."
       
       

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