Senator Schumer’s Six Proposals for ATS Regulation

Following yesterday’s press conference call with NYSE chief executive Duncan Neiderauer, Senator Chuck Schumer (D-NY) sent an official letter to SEC Chairman Mary Schapiro with six proposals to regulate alternative trading systems (ATSs) more like traditional exchanges.

Schumer’s letter begins, “I write out of concern that the proliferation of Alternative Trading Systems (ATSs) and the disparate regulatory treatment between these ATSs and registered exchanges is creating a two-tiered system that undermines the transparency of our national market system and exposes our capital markets to significant additional risks.”

The six proposals include establishing consolidated market surveillance, the costs of which would be covered by each trading venue based on their proportion of trading volume.

Schumer is also calling for broker/dealers to obtain SEC approval before operating an ATS or amending their existing ATS. He says, “I believe the establishment of a trading venue is no light matter and that an ATS should demonstrate that it has adequate policies and procedures in place to ensure compliance with applicable laws and regulations by itself and its users, and to monitor system capacity, security, and contingency planning procedures as described below.”

The third proposal would require all ATSs to put procedures in place to review system capacity, security and contingency planning. Reg ATS currently requires ATSs to adopt these types of policies and procedures if 20 percent of more of average daily volume of any NMS stock take place on that ATS for four of the last six months.

Daily and standardized reporting is also called for in Schumer’s proposals. Currently ATSs are required to report trades to the Consolidated Tape on a 90-second delay and report aggregated trade volume to the SEC quarterly. Schumer sights concern that the precise amount of trading volume occurring in non-displayed markets is hard to quantify and that the information is only available quarterly as a reason for better reporting.

Schumer also says the percentage threshold for order display should be lowered and the fair access threshold should be reviewed. Right now ATS are required to disseminate their quotes for any NMS stock to the Consolidated Quotation System if five percent or more of the aggregate daily share volume has been traded on that system for four of the last six months. Schumer requests that threshold be lowered from 5 percent to 1 percent.

But he does add a side note about block trading systems. “However, I recognize the important role that certain ATSs fulfill by executing large block orders on behalf of institutional investors in a non-display environment, and I would urge the Commission to consider an exception to the one-percent threshold as may be necessary to facilitate such block execution services.”

Lastly, Schumer says that actionable indications of interest (IOIs) should be treated as firm quotes under Reg NMS. He says these actionable IOIs operate similar to flash orders and should be banned.

He states, “These IOIs bear virtually all the indicia of a firm quote, but are not required to be treated as such under Regulation NMS. As a result, very detailed information about potential order flow is exchanged among a small group of market participants, presenting even greater opportunities for abuse as flash orders. This anomaly should be eliminated. While many indications of interest are perfectly legitimate, and contribute to the efficient functioning of the non-lit parts of our markets, I believe that IOIs that walk and talk like firm quotes should be treated as such under Regulation NMS.”